
Book 

Gojjyriglit]^'?- 






COFYRtCin DEPOSIT 



J 

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PREFACE 

In questions of economic theory the writer conceives 
himself, as among his colleagues of the craft, to be in essen- 
tials rather a conservative than an innovator. The Socialists, 
indeed — with whom he disclaims all theoretical sympathies 
— seem to him to be the ultra-conservatives in doctrinal 
positions. Mostly, therefore, his attack upon the moderns 
is for the violence done by them to the older doctrine, either 
in the bad choice of the portions to be emphasized, or through 
attempted additions which in general have brought no gain 
and have often imposed serious loss. In his own sort, doubt- 
less, he similarly aspires to reformulate or to extend or to 
reconstruct the established principles and categories, but 
this rarely or never with the purpose to abandon them or 
to put in issue or to place in hazard their central and intrinsic 
truths. As between a reactionary loyalty to the old, and 
an innovating zeal which reforms only in essentials to de- 
stroy, he would choose a middle course — to prune in order 
to save, to engraft only to complete, to restate only in fun- 
damentals to reaffirm. It is, then, especially with his fellow 
workers who see nothing good or enduring in the work of the 
masters, who condemn both superstructure and foundation, 
whose hope rests solely in building entirely anew, that he 
finds himself entirely out of sympathy. One should alto- 
gether despair of what the future may achieve who is com- 
pelled to condemn all that the past has done. That our 
predecessors saw imperfectly was unavoidable; but that 
they did not see at all is incredible. There were great men 
in those days — albeit fallible men — in close and intimate 
grip with the facts. Mostly in what they did not do, rather 
than in what they did, consisted their imperfections. To 
fulfill the prophecies rather than to destroy, to supplement 
the half-truths, to limit too-inclusive formulas, to articulate 



vi PREFACE 

the disconnected generalizations, to find the synthesis which 
shall harmonize the superficial contradictions, — in this way 
progress lies. It is, then, upon issues as to the degree and 
the direction in which the later thought has proceeded that 
mostly the present writer contests the views of his fellows. 
As against most of these he claims for himself the position 
of conservative. 

It is, therefore, only upon the applications of economic 
science to the problems of practical progress that he is to 
be taken as a radical economist or as qualified to apply for 
membership among those thinkers who are facing toward 
the new day — the disturbers at large of the peace. Had it 
been within the reach of his power, this book should have 
set forth the economics of a new political and social program ; 
as it is, the work expresses only an aspiration. Chief, how- 
ever, among the monopolies that he would condemn is the 
monopoly, so far enjoyed by the reactionaries, of all author- 
itative economic doctrine. 

H. J. DAVENPORT. 

University of Missouri, 
October, 1913. 



ANALYTICAL TABLE OF CONTENTS 

CHAPTER I 

PAGES 

Fundamental Conditions: Man and Environment . 1-18 

Income (product) comes from men and their possessions, and 
consists of goods, 1; and is limited by consumption, 2; not de- 
rived from standard of living nor determined by desires, 3 ; nor 
by volume of money, 4; inevitably tvrof old in origin — men and 
environment, 5; difference of environments in effect on income, 
6; differences in men — in strength and industriousness, 7; in 
knowledge, 8; in morality, 8; in institutions, 9; interactions be- 
tween men and environment, 11 ; take place mostly in the human 
factor, 13 : in any case are mostly due to intelligence, 13-14 ; but 
are confined within narrow limits, 15; conditions determining 
relative supplies of goods, 17 ; summary, 18. 

CHAPTER n 

Competitive Economics ; The Regime of Price . . 19-27 

Institutions change, 19 ; competition a present institution, 20 ; 
its characteristic traits, 20; price its central characteristic, 21; 
pervasiveness of price, 22 ; criteria of definitions, 25 ; economics 
defined, 26; summary, 26. 

CHAPTER m 

The Regime of Price {Continued) 28-32 

Price the pivotal point in all economic competitions, 28; and in 
distribution, 28-29; but only so in the competitive order, 29; the 
classifications and generalizations of which must conform to the 
nature of this order, 29; but must avoid appraisals, 29-30; or any 
assumption of permanency or merit in the facts treated, 30; 
human desires common to all economic systems, 31 ; summary, 31. 

CHAPTER IV 

Specialization and Trade Related to Money . . 33-41 

Specialization imposes interdependence and promotes efSciency, 
33 ; isolation and independence imposing inefficiency for the indi- 
vii 



i/ 



viii ANALYTICAL TABLE OF CONTENTS 

PAGES 

vidual, 34:-36: and for nations, 36; specialization postsible in the 
competitive order only through trade, and trade practicable only 
throuph intermediates, 37; barter itself connoting multiplicity of 
media, 38 ; not goods but money competitive demand for goods, 
39; value being mostly restricted to the price form, 39; sum- 
mary, 40. 

CHAPTER V 

The Adjustment of Price 42-56 

The view of the outsider, 42 ; of the insider, 43 ; of the econo- 
mist, 44; unreserved supply against one demand, 45; against 
several, 46; supply with reservation prices, 47; graphs, 48; 
reservation prices as holders' demands, 50-51 ; goods demands 
for money, 51; utility related to demand, 51; logic of the mar- 
ginal analysis, 53; price fixed not by averages, or by demand 
v' solely, or supply solely, or by margins, or by marginal pairs, 54 ; 
summary, 54. 

CHAPTER VI 

Supply Determined by Cost of Production . . . 57-84 

Price affects purchases, 57; supply affects price, 57; costs of 
production affect supplies relatively to one another, as an expres- 
sion of specialization of production, 58; supplies dependent upon 
choice of sacrifice — sacrifice being expressed as cost, 59; alterna- 
•^ tive opportunities costs, 60; what sacrifice cost includes, 61; 
opportunity cost the leading coUectivist category, 62; as also a 
competitive cost, 63; cost as reservation price, 64; supply limited 
at marginal cost, 64; the marginal analysis, 64; marginal cost in 
relation to opportunity, 65; various cost bases, 67; one's own 
possessions and cost, 67 ; a typical cost account, 68 ; cost a for- 
ward-looking computation based on past experience and affecting 
future product, 69; includes all resistances under the price de- 
nominator, 70; cost and supply z;s. demand, 71 ; cost as expressing 
resisting demands, 72 ; the focusing point of many influences 
bearing upon the entrepreneur, 74; which the economist must 
investigate, rather than the entrepreneur, 75-76; marginality 
personal rather than instrumental, 77-81 ; the marginal enterprise, 
78; marginal discomfort, 79; other margin-determining influ- 
ences, 80 ; the limited significance of marginality, 82 ; pains and 
their significance, 82 ; summary, 83. 

CHAPTER VII 

Utility ; Demand ; Demand with Supply . . . 85-105 

Price everywhere determined by demand and srpply and 
changed by changes in either or both, 85; no demand without 



ANALYTICAL TABLE OF CONTENTS ix 

PAGES 

utility, 85 ; which is desiredness — changing as desires change, 86 ; 
a relation to a human being and in this sense solely a quality, 87; 
no demand without marginal utility, 88; marginal utility dis- 
cussed, 89-91; therefore no demand without scarcity, 91; not 
marginal utility alone but a comparison of marginal utilities, sub- 
jective valuation, gives demand, 91-93; a marginal demand indi- 
cating an equality ratio between alternative marginal utilities, 
93 ; neither marginal demand nor marginal price fixes price, nor 
both together, 94; all items, marginal and other, participating, 
95; intramarginal higgling, 96; all utility, marginal and other, 
purely individual — social utility irrelevant, 97; utility, marginal 
utility, and comparison necessary to explain demand, 97-102; 
neither of which excludes impulse or habit, or instinct, 98-99; 
or involves a hedonistic theory of desire, or any necessary rela- 
tion to pleasure and pain, 99; or even always deliberation and 
calculation, 100; the nature and limits of abstraction and gener- 
alization, 100-102 ; summaries, 103, 104. 

CHAPTER VIII 

The Significance of Cost of Production . . . 106-119 

Entrepreneur cost not ultimate, 106 : but finds no explanation 
in pain ; unexplained, leads to superficial and circuitous analysis, 
107-108; still inevitable and important, being actual, 109; and 
pivotal, 110; causal sequence on the cost side, the supply side, 
111; all explanations which are not genetic imply a preceding 
and conditioning price situation, 113 ; and a moving equilibrium, 
113-114; a necessary method of analysis, 115; the interrelation of 
bases of cost, 116 ; summary, 116. 

CHAPTER IX 

What is Production ? What Things are Productive ? 120-136 

Activity and enterprise employing a variety of means, 120 ; to 
a diversity of ends, material and immaterial, 120 ; test of produc- 
tion net proceeds, price results, 121 ; not in materiality, 121-125 ; 
accumulatability, 123; but in objective price-bearing results, 123- 
124; therefore men are not products, 124; subject matter of 
economics classified, 125; ethical criteria inapplicable as test of 
product, 126; parasitism and predation irrelevant, 127: so the 
question who consumes, 127; the various sources of product — 
proceeds, 128 ; saloons, gamblers, and thieves productive, 130 ; so 
intangible properties, 131 ; irrelevant to product who is user, 131 ; 
wealth, capital, and property distinguished, 132 ; rent and interest 
distinguished, 132: innumerable directions of investment of pro- 
ceeds, therefore innumerable varieties of costs, 133 ; summary, 134. 



X ANALYTICAL TABLE OF CONTENTS 

CHAPTER X 

The Distributive Process : Apportionment of Pro- 



137-158 



Distribution according to the productivity theory, 137 ; a price 
process, 138; relates only to primary distribution, 138; which is 
captained by the entrepreneur, 139 ; theory laclis precision, 140 ; 
production and consumption goods similar in point of the price 
process, —in demand, 141; in supply, 142; the entrepreneur's 
standpoint merely indicates the direction iu which the explana- 
tion is to be sought, 143; demand as distinguished from utility, 
144; demand motivates supply, 144-145; but reports accurately 
neither utility nor the price significance to the entrepreneur, 145; 
hire being merely market price of the efficiency, 146; nor accu- 
rately is there a distinguishable specific efficiency, 146-148; nor 
is specific efficiency necessary in order that profits and opportu- 
nities function as costs, 148 ; the productivity theory only approxi- 
mately true, and then only when product means proceeds, 150-152 ; 
there are hirers' surpluses, 151 ; social marginal productivity, 
' 153; distribution ethically viewed, 153; property and deserving, 
154; summary, 155. 

CHAPTER XI 

Different Bases op Cost and Distributive Shares 159-177 

Cost outlays various in direction, 157; mainly wages, profits, 
instrument rents, and interest, 160; including equally all instru- 
ment hires, 160; compelling a new concept of capital, 161-162; 
and a new doctrine of costs, 162, 164; condemning traditional 
tests of labor origin, 163, 165, 167; of materiality, 165; of mo- 
bility, 168; of technological functions, 168; of elasticity of sup- 
ply, 169 ; of political or social significance, 171 ; of relations to 
diminishing returns, 171 ; what capital is, 172, 175 ; proved by in- 
come in time, or by discount, or by interest, 173; the importance 
of the issue, 175; summary, 176. 



CHAPTER XII 

Land : Rent and Instruments as Cost : Land Rent 

AND Cost 178-195 

Substitution possible between factors, 179 ; this not inconsistent 
with complementarity, 179; no warrant therein for the threefold 
classification of factors, 179 ; limitation on substitutions in agri- 
culture, is spatial, 179; else no land shortage possible, 179; nor 
higher rents and prices with increasing population, 180; effect of 



ANALYTICAL TABLE OF CONTENTS xi 

PAGES 

land shortage on wages, 180 ; extensive and intensive cultivation 
as related to rent, 181; to prices and wages, 182; to hires and 
instrument costs, 183; Ricardian doctrine of rent stated, 181-183; 
developed and examined, 183-188 ; rent as cost, 186-187 : the post- 
Ricardian disciples, 186; various differentials related to cost, 188- 
189; fundamental determinants of rent, 190; costs as distributive 
shares, 190; cost purely an entrepreneur computation, 191; the 
entrepreneur uninterested in ultimate determinants, 192 ; various 
costs indistinguishable relative to price determination, 193; sum- 
mary, 193. 

CHAPTER XIII 

Urban Rents, Agricultural Rents, and Costs . 196-208 

With urban rents not fertility but only position important, 196 ; 
nature of advantages, 197 ; rents affected by demand for products, 
and by changes in technique irrespective of owners' deserts, 198 ; 
social aspects of proportions of factors, 198-199 ; developing tech- 
nique in transportation and manufacturing tends to increase 
urban as against rural rents, 200-202 ; effect of urban transporta- 
tion on distribution of urban rents, 203; urban rents related to 
costs, and to price, 204-207 ; fundamental causes of rents, 207. 



CHAPTER XIV 

Capitalization vs. Cost as Determinant of Price . 209-218 

Different goods affording incomes present and future, 209; 
present price related to future income, 210; through capitaliza- 
tion, 210 ; but not so with free men, 211 ; capitalization vs. cost 
as determinant of price, 211-216; with durable consumption 
goods, 212; with durable production goods, 213; effects of 
changed proportions of factors, 215-216; summary, 217. 



CHAPTER XV 

Capitalization the Process by which Future In- 
comes achieve Present Worth .... 219-235 

Future services, 219 ; the effects of time perspective, 219-220 ; 
doubtful as bearing upon mere consumable goods, 220; but clear 
with money or with goods under money price, 221 ; as with a 
series of money incomes, 222-223; or with future incomes with 
indefinite money size, 224 ; the commonly accepted view insuffi- 
ciently individualized, 225 ; any view prone to overrationaliza- 
tion, 227-232; present things commanding future services have 
present utility, 229 ; summary, 232. 



xii ANALYTICAL TABLE OF CONTENTS 



CHAPTER XVI 

PAGES 

The Discharge of Debts : Deferred Payments . 236-253 

Each good has many values — each value an exchange ratio be- 
tween terms specific and quantitative, 236 ; barter implies value 
but no price — money exchanges only price, with all value rela- 
tions mere deductions, 236; exchange dependent on specialized 
production, 237; the money economy, 237; a standard inevitable 
in deferred payments, 238 ; no equality in value since value is not 
quantitative, 239-242; but is only a ratio which is actual only as 
price, 240; this true over intervals of space, 242; of time, 242; 
and equally in present exchanges, 242; money has not one but 
innumerable values, 242; no value is measurable, measurement 
being quantitative and values not, 243; meaning of instability, 
244-230; injustice of, 245; evils of speoulativeness, 245; deferred 
payment merely one case of exchange, 246; test of stability is 
utility, the things traded being not values but goods, 247 ; the de- 
sideratum is indemnity, 248 ; in terms of immediate consumption 
goods rather than of durable goods, 249-251 ; summary, 251. 

CHAPTER XVII 

Money, Credit, and Banking 254-331 

Currency the intermediate in exchanges, 254 ; all functions are 
aspects of intermediateship, — standard, storehouse, payment, 
255; money defined, 256-258; necessary qualities, 259; banking 
and the issue of credit, 260; reserves and their function, 260-262; 
economy of money, 262; banking viewed separately and in the 
aggregate, 263; what banking really does, 263; deposits and 
solvency, 264; creative of loan funds, 264; cost of currency from 
banks and from mines, 265-267 ; analysis of costs in the issue of 
credit, 265-266; the demand for media, 267-269; traders' sur- 
pluses, 267; the allocation of these, 267-269; the sellers' the 
greater, 268; volume of currency and prices, 269-278; the value 
of gold in relation to demand, 270; commodity uses as demands, 
271; monetary theory peculiar, 271; elasticity of demand, 271- 
273; all prices affected equally by changed volume, 273; prices 
affect one another and tend to move together, 274; relation of 
supply of gold to its utility, 275 ; supply of banking media related 
to prices, 276 ; discount rates and prices, 276, 278 ; Gresham's 
Law: international trade, 278; currency expansions, interna- 
tional trade, intercommunity trade, 279; commercial crises, 280- 
285; preceding conditions, 280; rising prices, 282; the reaction, 
282 : benefits and dangers of credit, 283 ; ameliorations, 284-286 ; 
disorganized banking vs. unified reserves, 286-287; responsibility 
for panics, 287 ; double counting of reserves dangerous but not 



ANALYTICAL TABLE OF CONTENTS xiii 

PAGES 

most serious danger, 289; contraction through scramble for re- 
serves, 289-291; is all credit therefore contracting? 291-294; 
effects on production, 293; the remedy, 294-295; post-panic de- 
pressions, 295-306 ; effects of rising prices on dividends and credit, 
295 ; cause and effect of narrowing margins, 297 ; the delay in re- 
covery, 298; restricted consumption and overproduction, 300-302; 
hoarding of money and credit, 302-303 ; investment with restricted 
saving, 304-305; savings, luxury, charity, waste, 306-310; quan- 
tity theory of money, 310-321 ; admitting that not goods but only 
goods at a price are demand for money, 311-312; and that not 
goods as an aggregate but only goods separately exchange against 
money, 312-314 ; nothing follows adverse to the quantity theory, 
314-316; quantity of currency rather than money important, 316- 
317 ; credit retains a fixed ratio to money, 317 ; the phenomena of 
banking in relation to the quantity theory, 318 ; and the phenom- 
ena of depressions, 319; changed demand and reservation prices, 
319-321; bimetallism, 321-331; effects of demonetization, 321; 
compensatory action and its effects, 321-324 ; national and inter- 
national, 324-327; advantages of international bimetallism con- 
jectural and unimportant, 327-330 ; what fluctuations are 
important, 327; and what the proper base-lines, 328. 



CHAPTER XVIII 

Loan Fund Capital 332-354 

Interest determined as price adjustment, 332; social capital, 
333; money as capital, 334; whether credit is capital, 334; what 
private capital includes, 335 ; collectivist capital, 336; method of 
increase of private capital, 337; saving and lending, 337; private 
capital divergent from social capital, 337-342 ; borrowed thing, 
repaid thing, premium thing, all currency, 342-347 ; the loan fund 
widely and authoritatively recognized, 344-347 ; loan and rental 
contracts distinguished, 346 ; loan fund derived from saving and 
from banking, 347-349; effects of banking on interest, 349-352; 
banking essentially underwriting, 351 ; discount rates analyzed, 
351; summary, 352. 

CHAPTER XIX 

The Loan Rate : Interest 355-397 

Income a currency flow, 355; loans a method of modification, 
356; interest the payment to achieve this, 356; loan fund fur- 
nished by saving and by banking, 356-357 ; much capital is origi- 
nal bounty, 358; saving never painful, 359, 362; interest rates 
not necessary to saving, 361 ; abstinence, rightly interpreted, a 
truism, 362; influences to modify individual's saving, 364-366; 



^' 



xiv ANALYTICAL TABLE OF CONTENTS 



K 



PiGBS 

saving and banking as sources of loan fund, 36(5 : different absti- 
nence theories, 367-376 ; land and capital in interest theory, as 
per Bullock, Hadley, Senior, and Taussig, 373-375; productivity 
in time gives interest, 376; gains from investment give inter- 
est, 377; so also durable sources of service, 377; rents related to 
interest, 378; renters' surpluses and interest, 379; no implication 
of social service, 380; various independent causes, each adequate, 
381 ; the process of fixatiou a price process, 382 : reservation prices 
in interest theory, 383 ; the concept of a market, 383-385 ; interest 
not an adjustment of pleasures against pains, 385 ; social explana- 
tions and the social organism, 387-393 ; method of hypothesis, 390; 
the social cosmos, 391-393; summary, 388, 

CHAPTER XX 

Risk, Profit, and Interest 398-406 

Risks, insurable and non-insurable, as costs, 399-401 ; advan- 
tages of affiliations, 399-101 ; risk costs greater as competitor is 
■weaker, 399, 400; risk as limit on size, 400; risk as related to 
profit and interest, 401-403 ; profits and social welfai'e, 405 ; specu- 
lation, gambling, and underwriting, 404; summary, 405. 

CHAPTER XXI 

Capitalization and Discount Rates .... 407-412 

Resume of previous conclusions, 407-409; not one but many 
interest rates, 410; these related to the capitalization process, 
410; capitalization doctrine circuitous unless individualized, 411. 

CHAPTER XXII 

Classification op the Factors of Production . 413-422 

Scope of the objects of cost outlays, 413; traditional view of 
these, 414 ; land vs. capital, 414 ; traditional view collective and 
genetic, 415; also technological but inaccurate, 416; many kinds 
and degrees of factors, 417; interrelations and interactions num- 
berless, 419; interdependence and substitution, 420; traditional 
classification indicted, 421 ; summary, 421. 

CHAPTER XXin 

Laws of Return : Profitable Proportions : Profitable 

Size 423-445 

Industrial facts underlying the law of proportions, 423 ; social- 
static formulation, 424, 425 ; social-dynamic, 425 ; competitive- 



ANALYTICAL TABLE OF CONTENTS xv 

PAGES 

Static, 426; differences in entrepreneurs, 427; classification of 
factors irrelevant, 428; a price calculation, despite various au- 
thorities, 429; deductions, 430; more than a land law, 431; or 
than technological law, 431 ; competitive-dynamic formulation, 
433; deductions, 434; distributive applications, 435; general ap- 
plications, 437; advantage in size, 437-443; size vs. proportions, 
438, 441 ; applies to industries in competition with one another, 
441; long-time and short-time best size, 442; law illustrated in 
what industries, 442 ; the applications, 442; summary, 443. 

CHAPTER XXIV 

Distribution and the Law of Proportions . . 446-458 

Costs mainly distributive shares, 446 ; traditional exaggeration 
of technology, 446; some factors technological, others not, 447; 
interdependence and substitutions, 448; distribution favors the 
relatively scarce, 448; complementary factors, 449; relation of 
population to wages, 450 ; confusions of static with dynamic, 450 ; 
wages and standard of living, 451 ; changes in factors require 
new distributive analysis, 452; effects of changed industrial tech- 
nique, 454; especially in agriculture on land rent, 456; elasticity 
of consumption related to land rent, 455-458; Gregory King's 
law, 456. 

CHAPTER XXV 

Costs in Corporate ani> Large Businesses . . 459-473 

Profits in the large organizations, 459; related to interest, divi- 
dends, and risks, 460; stockholders' operations in corporate 
stocks, 461 ; managers' operations for private gain, 461 ; business 
code of ethics, 461 ; cost related to monopoly supply, 463 ; giant 
industry contrasted with farming, 464-467 ; temporary cost not 
inconsistent with loss, 467; idle plants, 468; supply in average 
conditions, 469; in favorable conditions, 470; in adverse condi- 
tions, 471 ; partial applications of monopoly methods, 472 ; sum- 
mary, 473. 

CHAPTER XXVI 

Competition and Monopoly 474-487 

Monopoly and competition antithetical, 474-476; yet monopoly 
competitive in spirit, 476; good and ill in competition, 476; 
laissez faire criticized, 477-479; wastes of competition, 478; com- 
petition often self-destructive, 479 ; economies and advantages of 
size, 479; monopoly affecting buyers' and sellers' surpluses, 480; 
buyers' and sellers' combination, 481 ; monopoly theory and 
competitive theory, 482; pressure toward monopoly, cut-throat 



xvi ANALYTICAL TABLE OF CONTENTS 

PAGES 

competition, 482; unwise legislation, 484; combinations of combi- 
nations, 485 ; a degree of monopoly in all successful business, 486. 

CHAPTER XXVII 

The Social Dividend and the Individual Income . 488-503 

Social dividend the total of valuable benefits, 488 ; distributed 
mainly through money incomes, 490^91 ; products the primary 
fact, 490 ; in what these consist, 491-494 ; different sorts of serv- 
ices, 491 ; service from durable properties, 491, 492 ; privilege 
and power as income, 493, 494; primary and secondary distribu- 
tion, 494; property, especially natural bounty, related to distri- 
bution, 495 ; also franchises and monopolies, 496-497 ; great wealth 
controls high ratio of gains, 497-501 ; which defy accurate division 
into interest and profit, 498-501 ; summary, 501. 

CHAPTER XXVIII 

The Distributive Analysis in the Large . . . 504-533 

Scope of the chapter, 504 ; genesis of current economic doc- 
trines, 504-515; unproductive labor, 505; cameralism, 505; mer- 
cantilism, 506; physiocracy, 507; later views, e.g. Adam Smith, 
J. S. Mill, 508, 509; influence of English legal system, 510; Provi- 
dence guides, 511; natural law controls, 512; laissez faire, 513; 
modern views summarized, 514; criticized, 515-519; the census of 
wealth in the United States, 519; criticized for its concept of 
capital, 521; natural bounty, 522; wealth and poverty in the 
United States, 523, 524; enormous production and its explana- 
tion, 52.S-526; single tax and other taxes, 527; exploitation by 
franchises, monopolies, and private property in natural bounty, 
528 ; the need of a new economics, 528-533. 



THE ECONOMICS OF ENTERPEISE 



THE ECONOMICS OF ENTERPRISE 

CHAPTER I 

FUNDAMENTAL CONDITIONS: MAN AND ENVIRONMENT 

What income is and whence it conies. — There are ob- 
viously only two sources from which, in the main, society 
as a whole or any particular individual may derive an in- 
come : (1) from the efforts made, (2) from the possessions 
used. The only cases that fit clumsily into this statement 
are the unsought bounties of nature or of chance. 

Of any isolated individual man or of an isolated society 
or of the human race taken as a whole, it may, then, be 
safely asserted that the current product of goods for con- 
sumption — the aggregate income — must be derived either 
from current labor or from the productive possessions already 
acquired. All that society can have to-day it must acquire 
to-day or must take out qf_it_s.4)ast product. How much 
society can consume, how great is its aggregate command of 
the things that satisfy human desires, — goods, — is condi- 
tioned by the aggregate social production — the social divi- 
dend. This aggregate output, this social dividend, conditions 
and determines the average individual income, precisely as 
any other dividend conditions its quotient. And it is evident 
also that ultimately this individual income must consist en- 
tirely of the things that satisfy human needs ; that is, must 
consist in consumption goods, in those things that are 
wanted in their own right and not as means to the getting 
of something else. We have here no concern with the money 
in terms of which the incomes may be received — no neces- 
sary reference, that is to say, to the nominal income — but 
only to the ultimate control of consumption goods, the 
things that are wanted for their service to human beings. 

It is also evident that, in final analysis, all incomes are 

B 1 



2 THE ECONOMICS OF ENTERPRISE 

psychic incomes, the experience of having wants gratified. 
Consumption goods are ultimately not significant as the con- 
crete objective goods themselves, but for the services which 
they render — precisely as the vibrations of air that make 
sound concern each of us only as, by striking on the eardrum, 
they affect the consciousness. 

This social dividend — the current output of consumption 
goods — finds, then, its sources on the one side in the 
human productive power of society, its efficiency in work 
(labor), and on the other side in the degree and kind of 
equipment of society, its possessions — its environment of 
productive power and opportunity. 

That average consumption is limited by average produc- 
tion is not far from an axiom. None the less it needs em- 
phasis ; for in the complexity of actual affairs it is easy to 
lose a working grasp of it. We are, for example, often told 
that the reason why the average income, say in India, is 
so low is that the standard of living is so low : men have 
little because they desire little, rather than because they pro- 
duce little. Now it may well be that men produce little be- 
cause they desire little, but it is only in this way that desires 
can affect the quantum of product and thereby the average 
consumption. It is safe to say that there never was and 
never will be a race of men lacking in desires still to be 
satisfied, although it may well be true that the dislike of 
effort is one of the reasons why some desires fail of product 
for their satisfaction. But it still holds that the desires 
outrun the means of satisfaction. Conceivably, indeed, all 
labor might be pleasant ; and yet, by reason of the limited 
time for work and of the limited time for play and of the 
limited time for the enjoyment of the fruits of work, — a 
conflict among competing desires, — some desires for con- 
sumable goods must be thwarted of their fulfillment, the 
product being still inadequate for the satisfaction of all de- 
sires. Clearly, then, a low average of production is not due 
to the fact that all desires are satisfied. 

Do standards of living fix wages? — In the aggregate and 
average, then, men do not stop consuming because they want 



FUNDAMENTAL CONDITIONS 3 

no more goods but because they can get no more on terms 
that make this more worth while. Thus, in the assertion that 
wages are high in America because the standard of living is 
high, and low in India because the standard of living is low 
there, there is a sheer reversal of the causal sequence. A 
standard of living is merely a level of consumption so fixed in 
habit that any falling short is felt as a privation. America 
has a high standard because the per capita production in 
America is great : people have, therefore, acquired the habit 
of consuming much. The level of production fixes the stand- 
ard. The standard is causal in the case only so far as, in 
turn, it may react to affect the volume of product. Average 
income fixes the standard, rather than the standard the 
average income. Every few years some millions of people in 
India starve ; not because they do not want food, but be- 
cause they cannot get it. They are unable to get it because 
they are unable to produce it. That they have the habit 
of consuming little is merely another way of saying that 
they have always a scant margin of actual product over 
sheer necessity — a margin that may at any time disappear. 

The relation between desire and product. — But nothing 
in all this should put in question the truth that the fact 
fundamental to the production of goods is the desire for 
goods. Things would nowhere have human effort directed 
to them if they were not wanted. Desire lies back of 
product; human needs are the ultimate explanation for 
the putting-forth of labor, and, therefore, for the existence 
of the products of labor. But it remains true that the 
limit upon what is consumed is not the limit of desire but 
the limit of accomplishment. So, again, to say that wages 
are low in India because work is scarce holds in the sense 
only that wages are low because that sort of labor is 
scarce that is efficient enough, under the existing con- 
ditions, to command higher wages. It is true that needs, 
in that climate, are not as many, and that many of 
these are not as imperative as in severer climates; less 
suffices there than suffices here. But it remains true that, 
even with these less urgent needs, their wearily long work- 



4 THE ECONOMICS OF ENTERPRISE 

day leaves the East Indians scantily housed and clothed and 
fed. Recurrently famine mows down its millions of victims. 
So far, then, from there being no work to do, there is more 
work acutely needing to be done than can get done. The 
problem is greater than the work can solve ; the lack is not 
in the work to do but in the work done. 

Money versus goods. — Even more superficial is the at- 
tempt to explain a low average of consumption by the lack 
of money. From the fact that any one of us who has more 
money can have more goods to consume, it is sometimes de- 
duced that if all of us had more money we could all of us 
have more goods. But money is good only for buying things. 
The command of things to be consumed, and not the amount 
of money, is the limit upon what the total money can buy. 
Beware of the fallacy of reasoning from one to all. If you 
get hold of more coupon tickets against the restaurant you 
can have more viands, but only upon terms of so much 
the less for others. At all events, society as a whole cannot 
be fed by multiplying coupon tickets. Only product can 
solve that problem. One tree by growing faster can over- 
top the others, but not all trees by following this device can 
overtop all the rest. One runner may outstrip the others 
by his swift running, but all may as well stand still as run 
in an equal race. Average consumption depends upon aver- 
age production and not upon the volume of money claims 
against this product. 

What money does. — Average consumption is a question 
of labor and of factories, of herds and of crops, and not of 
money. Money is merely a great convenience in the pro- 
cess of making exchanges. We sell for money, but this is 
only to get the means wherewith to buy something else. 
Money simplifies the process. Without it one might search 
hard and long to find some one having what one wanted and 
wanting what one had. Money is that one commodity 
which has come to be accepted as the usual intermediate in 
trade. Its main service is as medium of exchange. But 
people could get on without any one money commodity, 
making their exchanges directly by barter, despite the great 
inconveniences of this method. Doubling the money would 



FUNDAMENTAL CONDITIONS 5 

not double the products of the fields and the factories, or 
the strength and skill of human beings. All these would 
remain as before. Money is not the cause or the basis or 
the test of aggregate well-being. The aggregate or average 
production is the ultimate fact in any society. Who has 
the money — the orders or coupons against the product — 
is a question of importance, but only as it bears on the dis- 
tribution of the goods produced among the different members 
of society. Any individual would like to have his own 
money doubled, just as any one of us would like an increased 
number of orders or of coupon books upon the grocer or the 
dry goods man — but only upon the condition that the 
money or orders or coupon books of other men were not also 
doubled. Increasing the coupon books would not increase 
the amount of goods which the grocer or dry goods man has 
in his shop. Thus the love of money, or the evil or good of 
this love, is ultimately the love of the things that money con- 
trols. Money is purchasing power — command over the 
things in life that are bought and sold. 

Man and Environment — Effort and Opportunity. — For 

our present purposes, then, the human race as producing 
agent in its relation to its environment is the subject matter 
of our study. Man, as the first term in the relation, is re- 
garded as standing over against an outside world of fact 
and circumstance, of which he makes such use, and from 
which he gets such aid and benefit, as he can. His problem 
is to adapt activity to opportunity, to seek out his best 
adjustment to his situation and his best utilization of it. 
He illustrates one aspect of the great law of correspondence 
to environment. The economist must, therefore, study hu- 
man productive effort with constant reference to the condi- 
tions which obtain, now to further, and now to limit, the 
resulting product. As with the individual, so essentially 
with society : success is not purely a question of pluck and 
brain; something must b6 allowed for surroundings and 
opportunity. Good legs and a fair field are both needed 
for fast running. So in all economic relations, socially or 
individually viewed, both actor and opportunity require 



6 THE ECONOMICS OF ENTERPRISE 

examination. Life, for each one of us, is a question of what 
there is in us plus what is outside — of our powers and ener- 
gies in the face of our surroundings and opportunities. Give 
Crusoe his island ; what will he do with it ? This is in part 
a question of Crusoe and in part a question of his island. 
For races, likewise, the problem is on one side a matter of 
character and capacity, on the other, of surroundings and 
opportunity. 

"Why there is plenty or dearth. — It should now be clear 
that wherever there is found a high stage of civilization, or 
great prosperity, or a high average production and consump- 
tion of wealth, the explanation must always lie in the char- 
acter of the people under examination or in the character 
of the environment in which they live. If the people in 
China have less per capita to consume than the people in 
France, it is because the Chinese produce less per capita 
than do the French ; and the explanation of this must be 
found in the lower vigor, or skill, or energy, or intelligence, 
or scientific attainments, of the Chinese, or in the unfavor- 
able character of the opportunities in which they live. If 
Americans are more prosperous and live better than Euro- 
peans, it must be that Americans are better producers, — 
more active, more inventive, more enterprising, — or that 
the soil and climate and other natural resources of America 
offer more advantageous opportunities for production. No 
one has great difficulty in understanding this principle as 
illustrated in the affairs of everyday life. Long ago it was 
remarked that not even the most skillful workman can make 
bricks without straw. Bad tools place the best of mechanics 
at disadvantage. Men do not gather grapes of thorns or 
figs of thistles. It takes more than a good farmer alone, 
or .than a good farm alone, to make a good crop. There 
must be both farm and farmer. Only opportunity improved 
is success. 

How environments differ. — The production, then, of 
goods by man, so far as it does not rest with the character 
of the actor himself, must find its explanation in the nature 
of his environment, — in the elements, in the varying condi- 



FUNDAMENTAL CONDITIONS 7 

tions of temperature, rainfall, sunshine, humidity, health- 
fulness, etc. ; in the soil, or, more accurately, in the land, its 
fertility and workability, its mineral resources, its convenience 
for industry and commerce ; in the varying sum of natural 
forces more or less within the control of man, such as winds, 
tides, electricity, gravitation, and steam. This enumera- 
tion is of necessity both incomplete and inexact. Climate 
cannot be definitely distinguished from winds, electricity, 
and light ; nor can natural forces be treated apart from ques- 
tions of navigation and convenience for commerce. Light, 
which may be used as a natural force for power or for the 
purposes of chemistry or of art, is, from another point of 
view, a factor in the fertility of the soil. But it is important 
merely to hold in mind that wealth depends upon the corre- 
spondence of two factors, — (1) man himself, and (2) the 
conditions surrounding him. He may, as we shall see 
later, in some measure modify surrounding conditions. But 
it will still remain true that the arctic regions and the tropi- 
cal deserts do not offer favorable opportunities for his wealth- 
producing activities. He may make for himself artificial 
lines of communication ; but rivers, lakes, and seas will 
retain an economic importance for this purpose. He may 
exist making small use of the opportunities offered by natural 
forces ; but it will remain true that in these rest the possi- 
bility of the greatest efficiency and the largest field for 
economic progress. 

How the human factor differs. — Turning now especially 
to an examination of the human factor in production, we 
note that, while the producing powers of men are, in appre- 
ciable degree, a matter of physical strength and endurance, 
a larger measure of importance should be ascribed to agihty 
and to concentration of effort. On this point, the German 
economist, Wilhelm Roscher, writes : 

"According to the reports of English manufacturers, an Eng- 
lish workman produces on an average almost twice as much as a 
Frenchman ; the latter in turn more than an Irishman. An Eng- 
lish wage earner who had worked in a French factory, speaking 
before the Parliamentary Committee, gave his opinion of the 



8 THE ECONOMICS OF ENTERPRISE 

French as follows : ' It cannot be called work they do ; it is only 
looking at it and wishing it done. Thus, for example, a good 
English spinner with an eight-hundred-spindle machine could pro- 
duce daily sixty-six pounds of yarn ; a Frenchman only forty-eight 
pounds. . . .' The report of an Agricultural-interest Commission 
places the North American workman above the English in good 
conduct, fidelity, and interest. A Berlin woodcutter accomplishes 
as much in ten days as an East Prussian in twenty-seven days. 
(Hoffman.) English planters on the Hellespont prefer to pay Greek 
laborers ten pounds sterling a year and their keep rather than Turk- 
ish laborers three pounds. So the Malay field laborer gets two and 
a half dollars per month, the Malabar four, the Chinese six." 

Probably equally important in production are the dis- 
tinctively moral qualities of men, and the social and moral 
conditions in which they live and for which they are largely 
responsible. Under modern conditions every corner of the 
world does business with almost every other. Business 
affairs are complex, of enormous magnitude, and highly 
centralized. Great factories, employing thousands of men, 
sell goods all over the world. The force of officers, clerks, 
and agents is necessarily large. The system of buying and 
selling on credit is widespread. Business must therefore 
be largely done on terms of trust and confidence. A certain 
degree of honesty and good faith is essential to the success 
of this system, and any society lacking in this respect must 
suffer thereby. These qualities are especially important 
under present conditions because most men must be wage 
earners serving under employers. The productive effective- 
ness of society must therefore largely depend upon the good 
faith of the employees. 

Again : in no society in which people lack in forethought 
for the future will work go on, unless under stress of immedi- 
ate need. The ability to wait, to see ahead, and to provide for 
the far-off want, drains the land, clears the forests, plans the 
machinery, constructs the railroads, and builds the factories. 

How intelligence affects product. — But most important 
among the characteristics of man as producer are his intel- 
lectual powers and acquirements. If we compare modern 
industrial processes with the methods of ancient times, we 



FUNDAMENTAL CONDITIONS 9 

get some notion of the importance of science and art in pro- 
duction. Especially in the world of economics is it true 
that knowledge is power. The savage made an enormous 
step forward when he acquired the knowledge of the bow 
and the rod. Tools increase by many fold the effectiveness 
of human energies. But when, by the use of machinery, 
man has harnessed to his aid the forces of nature, the 
field of progress is indefinitely widened. By spindle and 
loom he multiplies his product by hundreds. Steam and 
electricity, the printing press, the cotton gin, and the 
countless contrivances which make of every county fair 
a collection of marvels, and of every world's exposition 
a display of miracles — these are the fruits of that civiliza- 
tion into which each one of us is born as to a free heritage. 
And remember that behind the art and the skill in all these 
processes and methods, there is a world of pure science. 
No one has grown more grain than the chemist. The diffi- 
cult problems of industry are wrought out in the laboratory 
of the specialist. The investigators and inventors have 
revolutionized the methods and the organization of the 
modern world. The ruling forces of civilized life are the 
intellectual forces. The moral code of eighteen hundred 
years ago left, indeed, not much to be added. Lav/s, gov- 
ernments, institutions, science, art, invention, and dis- 
covery, — these are the facts which measure the distance 
between civilization and savagery. In these directions the 
progress of mankind is seemingly without limit. 

How social conditions affect product. — The effect of the 
social situation upon the productive power of the laborer 
may be great. The bearing of science and invention needs 
perhaps no further emphasis. Important, likewise, and 
sometimes in an equal degree, are the safety and security 
of the individual and of his property, — his freedom of 
choice, his immunity from different forms of injustice and 
exploitation. No society which, through disorder, crime, 
war, or overtaxation, unsettles the connection between 
industry and reward, can fail of enfeebling its productive 
forces. Security of life, property, and investment is essen- 
tial to high economic efficiency. 



10 THE ECONOMICS OF ENTERPRISE 

So likewise, while the institution of slavery may doubtless 
sometimes afford the most effective organization of labor, 
it is safe to say that no advanced society can reach its high- 
est possibilities in production, if men are not free to work 
for their own benefit and, if they so desire, under their own 
direction. Labor must be voluntary, and it must be assured 
of its reward, or it will not be vigorous and caretaking. 
It is certain that the wage of the coolie laborer of India — 
his real wage, his command of goods achieved through his 
labor — would be higher were he not taxed and tithed and 
rack-rented and plundered and exploited for the gain of all 
sorts of parasitic livers and wasters. Not only, then, do 
the toll-takers out of the products of others — the cuckoos 
and cow birds, the parasites, and the barnacles — redis- 
tribute the consumable goods produced in society, but also, 
by disturbing the relation between effort and the reward 
of effort, they may in serious measure reduce the produc- 
tive effectiveness of such labor as is done. Both slavery and 
feudalism suffered by this defect. Parasitism weakens the 
springs of motives for its victims and, at the same time, re- 
laxes the productive powers of those who wrongfully profit 
from it. 

But we are now concerned with the distribution of the 
social product only in the degree that the terms of the dis- 
tribution react upon production. The present question 
is the amount produced and not the terms of its division 

— the aggregate sum to be distributed rather than the de- 
termination and the apportionment of the individual shares 

— and we are logically held to this course since what is 
distributed depends upon what is produced. Before there 
can be distribution there must be production. We must 
first see our problem not in detail but in its large and general 
and aggregate aspects. An analysis of the distributive process, 
the forces and methods by which the shares, or fractions, of the 
aggregate product are apportioned — the most difficult prob- 
lem, or series of problems, in the field of economic theory ^- 
must await its later turn. 

But it is none the less true that, in the larger study of the 
social income as the joint product of human labor in coopera- 



FUNDAMENTAL CONDITIONS 11 

tion with productive equipment, the institutional situation 
is very important. Institutions, however, are a worldng 
consensus of human thought or habit, a generally established 
attitude of mind and a generally adopted custom of action, 

— as, for example, private property, inheritance, govern- 
ment, taxation, competition, credit. Thus, these institu- 
tions, when regarded from the aggregate and social point 
of view, are merely qualities and attributes of the human 
factor in production, affecting the product. They are man 
as distinguished from environment, possessor not possession, 
artisan not instrument, laborer not equipment, operator not 
appliance, internal not external facts ; they belong to the 
organism and not to the outside world. But looked at from 
the competitive and distributive point of view, their chief 
significance is in affecting the terms of the division of the 
aggregate product. 

Man and Environment : the interactions. — For a gen- 
eral understanding either of man or of environment at any 
given time, much must be allowed both for the accumulated 
influence of the environment upon man, and of man upon the 
environment. Just as we note that polar bears are white, 
and grass snakes green or striped — that bees taken to a 
climate of continual summer lose their habit of accumulating 
honey — that the fish in Mammoth Cave are without eyes 

— that the cultivated strawberry, set in the poor soil of 
the field to make its way against grass and weeds, reverts 
to its wild form, — so we find that the types of mankind 
reflect in countless ways the influence of environmental 
conditions. And, equally clearly, the environment reflects 
the modifying power of men. Waiving, for the moment, 
the question of which factor has the more affected the other, 
we may safely assert that man is not entirely the master of 
his fate, nor yet entirely the puppet of the forces by which 
he is surrounded. He is himself a force, a center of energy 
and activity. He is one of the facts in the complex interplay 
of human with natural energies. If he receives, he gives. 
If his environment rains its influences upon him, he puts 
forth his own efforts in adapting self to environment or en- 



12 THE ECONOMICS OF ENTERPRISE 

vironment to self. He strives and resists and reacts. George 
Eliot has put the case helpfully, when, in supplement to 
the half-truth, " Our deeds are fetters which we forge our- 
selves," she adds, " Aye, but I think it is the world that 
brings the iron." The history of human development is the 
story of what circumstance has done for man and man for 
circumstance — the play of outside forces upon him and his 
reactions thereto. There are thus two forces in the prob- 
lem of history, — man and nature. The resultant is the 
direction of human development. 

This is not a difficult notion. As has already been stated, 
it is merely one aspect of that which men of science call the 
law of adaptation, or of correspondence to environment. 
It is unnecessary for the purposes of Political Economy to 
push the question into an inquiry as to which of these two 
forces in human development, if either, is the primary fact 
and which the derivative. We may, for example, regard 
coral polyps as a product of the sea ; it is none the less true 
that, once existing, they not merely suffer but work the 
processes of sea change. It constantly occurs that a result 
becomes in turn a cause, — as, for example, in chemistry, 
where a product of combination or decomposition furnishes 
a basis for a new series of chemical changes ; or in physics, 
where in a row of blocks one falls as the result of an impact 
received, and by delivering its impact causes the next to 
fall ; or, in chemistry again, where combustion liberates 
gases which themselves furnish material for further com- 
bustion. Most things grow by what they feed on. 

Partly, thus, because environments differ, we find wide 
differences between different races of men, and between 
different men of the same race. We need not assert that 
all of these differences are due to environment ; clearly 
enough, however, some of them are. The human race ex- 
hibits the effects of adaptation otherwise than in color and 
physical power. Men have been profoundly influenced by 
their surroundings not only in health, strength, and stature, 
but also in habits, character, energy, and intelligence. One 
need only call to his aid his knowledge of geography to find 
this truth many times verified. 



FUNDAMENTAL CONDITIONS 13 

Adaptations are mostly organic and mostly intellectual. — 
If now we turn to a more extended study of the significance 
of the original environment, and to a more thorough examina- 
tion not only of the uses which man has made of it but of 
the changes which he has worked in it and of his methods 
of adaptation to it, we enter upon a field of surpassing in- 
terest but of endless detail. It will, however, become in- 
creasingly clear that, despite all that man has done in the 
modification of the habitat and in the accumulation of equip- 
ment, by far his greater progress has been worked out on the 
line of adapting self to environment rather than environment 
to self, and that the most and the best of these adaptations of 
man to his environment have been intellectual adaptations. 
In large measure, indeed, this is what we mean by civiliza- 
tion. Of this sort are the mechanical inventions already 
noted : '' The development of the material civilization per- 
forms for man the same service which actual physical adapta- 
tion discharges for plants and animals." ^ 

Man has, doubtless, done not a little by his skill to adapt his 
environment to himself. He has cleared forests, drained lands and 
fertilized them, dug canals, made roads, hewed tunnels, filled valleys, 
and laid mountains low. Something more he has done, also, not 
easily distinguishable from these achievements : He has improved 
upon his environment by adding to it, by erecting factories upon it ; 
he has mined things out of it, metals and fuel — or made things over 
from it, machines and tools — or harnessed it to do his bidding, in 
steam and wind and tide and waterfall. He has tamed its products 
to his use, animal and vegetable • — crossed them, selected them, 
perfected them. And he has opened up new uses for them as con- 
sumption goods, as well as new methods with them as production 
goods. He has gone down to the sea in ships ; he has learned its 
habits and tempers, and why and where and when and how to sail 
it, in whatever varying new models of craft or new methods of 
motive power. 

Note, however, that much of this accomplishment is not, in any 

1 Gregory, Keller, and Bishop, Physical and Commercial Geog- 
raphy, p. 127. This admirable work has been ruthlessly pillaged 
for facts and materials for purposes of the present discussion. The 
quotations in the half-dozen pages following are all from this source ; 
and, for what remains, liberal use has been made of paraphrase. 



14 • THE ECONOMICS OF ENTERPRISE 

accurate sense, a conquest of nature or even a modification of it. 
By almost insensible gradations these various successes shade off 
into sometliing quite different from conquest — into adaptations 
which are not so much a modifying of the objective conditions with 
which man has to deal as a conforming of himself and of his methods 
to the situation which he has to face. In point of fact, also, his 
actual accomphshments of conquest, many and splendid though 
they are, go hardly more deep than skin scars. In larger part his 
triumphs have been of another sort — triumphs of strategy or of 
evasion rather than of conquest. So much, however, he has ac- 
complished in the total that he is prone not to see accurately what 
it is or what were the methods — whether he has really leveled the 
obstacles before him, or has rather climbed over or gone round them. 
His exploits do not commonly appear to him to be an adaptation of 
himself to conditions which he could not alter : "He often thinks he 
is conquering nature when he is really discovering nature's laws and 
conforming to them. Man can neither create nor annihilate nat- 
ural forces : under many conditions he is their plaything, but by 
observing their ways he can often so direct his own action in respect 
to them as to escape detriment or even gain proiit from their action." 

Those modifications, then, with which the issues of civihzation 
chiefly rest, are changes taking place in the human factor in the 
problem — modifications in the organism, either for good or for ill. 
And in the main, also, as has already been suggested, these modifica- 
tions are of the intellectural rather than the physical type; and 
especially is this the case for such modifications as are advantageous. 
And note also that changes of the purely physiological or instinctive 
type — those varieties of change to wliich the adaptations in the 
lower orders of life are almost entirely confined — are limited in 
number and are of relatively slow accomplishment. Some changes 
of this sort, however, there undoubtedly are, as, for example, in the 
pigments of the skin ; in increased power of resistance to cold or 
heat ; in acquired immunity, complete or partial, to certain forms of 
bacterial menace. Antitoxins appear, indeed, to have been racially 
elaborated to the point of furnisliing a partial immunity against 
certain diseases. 

There can, in fact, be no question that it is through the processes 
of intellectual adaptation that human progress mostly takes place, 
as it is to the lack of these adaptations that stagnation or retrogres- 
sion is often due. It may, however, be true that it is the environ- 
ment that in most cases determines what intellectual modifications 
shall take place and how far they are to be effective either for good 
or for ill. 



FUNDAMENTAL CONDITIONS 15 

Especially in questions of climate do these intellectual modifica- 
tions count for much with the human race. Lacking self-grown fur, 
man appeals to the arts and implements of the chase, or to his skill 
in textile making, fending thus both against arctic winds and torrid 
suns. His intellect levies tribute for him upon the fauna and the 
flora of his environment. Houses are only looser fitting clothes — 
as perhaps the snail might credibly bear witness. And these cli- 
matic adaptations of the intellectual sort go further : If men cannot 
acquire, through mere use and wont, immunity against disease, they 
can, in many cases, remove the causes — drain the swamps, suppress 
the mosquitoes, destroy the rats. Man teaches himself new methods 
of diet, new rules of work and of rest, new habits of living. Out of 
his knowledge of bacteriology, he provides himself with prophylac- 
tics and preventives. In short, he summons to his aid the resources 
of modern sanitation, of preventive medicine, and of remedial medi- 
cine. 

The limits of adaptation. — It should now be clear that, 
under the most favorable as well as under the least favor- 
able conditions, the better part of man's adaptation has been 
an adaptation of self to environment rather than of environ- 
ment to self ; and that it has been, on the whole, an intellec- 
tual rather than a physical adaptation. In the fact that 
man has taken thought " is the key to his special power of 
adaptation ; . . . this sets man apart from the rest of the 
animal world : . . . weaker in body, slower of foot, duller 
of scent and sight, ... he becomes superior to them all 
through his capacity for mentally conceiving the require- 
ments of a situation and taking advantage of them." 

In the main, however, these processes do not go far. 
Unfavorable climates and their attendant diseases are likely 
to prevail in the contest. That these diseases tend with 
time to become less virulent, is merely another aspect of the 
fact that while they are new they make frightful ravages. 
The racial reaction is discouragingly slow, and defeat is 
commonly declared in the earlier contests. But, in any 
case, defeat is almost certain, unless the change in habitat 
takes place gradually, or unless the process of acclimatiza- 
tion comes about along the line of intellectual adaptation. 

But, at the best, man's battle for tropic victory is, 
on the whole, a losing battle. Something he does ; yet he, or 



16 THE ECONOMICS OF ENTERPRISE 

his children, or his children's children, one day give up the 
struggle. The tiger and the hyena man may drive from 
the jungle; even the venomous snakes he may exterminate. 
Possibly, also, he may hold afar off the pestilences of the 
night and the wasting fevers of the noonday. But the torrid 
heat is still there : if he remains with it, he finally surrenders 
to it, is paralyzed by its bounties, lulled to its languors, 
relaxed to its temptations, weakened to the level of its tasks. 
For it is evident that, with the passing centuries, civiliza- 
tion is not advancing its frontiers further into the tropics; 
rather it is progressively retreating, making good this loss 
by new conquests further toward the poles. From its sub- 
tropical cradle civilization has moved steadily north and 
west. The beginnings had to be made where the problem 
was easy — where some energy for progress could remain 
over from the sheer necessities of living. These early habitats 
were the racial kindergartens. But their discipline once 
conferred, the problem grew too easy to be disciplinary. 
Thereafter, only habitats more urgent in needs and more 
austere in gifts could afford the conditions of progress. 
The original habitat meant henceforth a deterioration of 
racial stock. " Bread fruit, introduced from the Pacific, 
is said to have carried the Caribs back to savagery." So- 
cieties, like individuals, when once mature, demand meat 
fit for men. The tests, the problems, the gymnastics of 
childhood, must be put away with all other childish things. 
Tasks require to be apportioned to strength ; tepid baths 
for the sick, but the cold douche for the strong. The best 
temperature is the reaction limit. Even for moral growth 
ignorance and innocence are not one but two; one rightly 
prays only that he be not led into temptation beyond his 
strength. 

It may, then, be taken as established that a high level of 
civilization is impossible in those zones where the snow never 
falls. Precisely as progress is too difficult a problem in the 
frigid zones for any race yet fully to have solved it, so the 
problem of mere existence in the tropics is so over-easy of 
solution as to have degraded man, through stagnation and 
ignorance, into an incapacity for civilization. 



FUNDAMENTAL CONDITIONS 17 

The relative plenty or scarcity of products. — Still con- 
fining ourselves to this large and aggregate and, in the main, 
social view of production, we find no difficulty in under- 
standing why those things that are easy to get are relatively 
plenty, and those things difficult to get are relatively scarce ; 
or in understanding how things are relatively easy to get 
when the labor and the instruments for their production are 
relatively plenty. In countries where the land and the sun 
and the air are especially favorable for the production of 
fruit, fruit is likely to be plenty and is, therefore, likely to 
be cheap. Or — were we yet ready to discuss competition 
and prices — the same facts might be interpreted to mean 
that because of the abundant means of production, the costs 
of production are relatively low and the products therefore 
low in price : that winter flowers and summer ice are nec- 
essarily dear ; that fish are low priced at the ocean side, be- 
cause, the facilities for production being practically without 
limit, nothing need be paid for the opportunity to use them. 
Goods at a distance from the conditions favorable to their 
growth or extraction must sell at an increase in price because 
of the greater difficulty of attainment. In a social view, 
these difficulties of attainment express themselves merely 
as the relative scarcity of the means of production ; in the 
competitive economy, as higher money costs of production. 
Transportation is itself one of the processes of production. 
Goods which can be transported only short distances, or not 
at all, are markedly cheap where the facilities for their 
production are especially plenty, and markedly dear where 
the facilities are especially scarce. 

But causes of plenty or scarcity of products are to be 
traced, not solely to environmental conditions, but also to 
plenty or scarcity on the human side. Where any line of 
ability is common, the products from it will be plenty. The 
result in a competitive society must be that this line of 
ability will be poorly paid and its derivative products low 
priced. Carvings are cheap in Oberammergau, music in 
Italy. When doctors of philosophy are plenty, they may 
command no more per year than the football coach — a 
scarcer sort of man — may claim per month, — it being 



18 THE ECONOMICS OF ENTERPRISE 

assumed, of course, that the services of both sorts of men 
are wanted. 

We have, then, come thus far in our analysis : On the 
appetitive side man is a being of needs and desires which he 
must satisfy mainly through the various processes of pro- 
duction. His success as a producer is twofold in aspect : 
(1) his personal powers and capacities — his character as 
organism ; (2) the nature of his habitat — his possessions, 
his exterior equipment both as aid or opportunity and as 
limitation. What things he produces and how many are 
questions, on the one side, of what he wants — on the other 
side, the supply side, questions of his productive power; 
what he has depends upon what he can do, and what he 
can do depends upon what he is and what he has to do with. 

Chapter II will examine the institutional conditions under 
which the production of wealth takes place; the charac- 
teristic traits of a competitive individualistic society; its 
pecuniary organization; the relation of the price system to 
its organized activities ; private property and the relation 
of it to private gain ; the significance of money and of 
pecuniary methods and standards ; the concepts of price 
and of value; the delimitation of the economic field; and 
the definition of Political Economy. And from all this some 
advance will be made toward an understanding of what is 
meant by the Regime of Price and what is the nature of 
competitive institutions. 



CHAPTER II 

COMPETITIVE ECONOMICS ; THE REGIME OP PRICE 

Institutions change. — It is a bad habit of thought to 
assume that present conditions — and especially the present 
economic organization — have always been much as they are 
now, and will always remain so. We have, it is true, an 
existing regime of which the leading traits are private prop- 
erty, individual initiative, and competitive production for 
the purposes of exchange. And to say that men produce 
things mostly for the purpose of selling them amounts to 
saying that in business affairs all of us are trying to get money 
for goods — are reckoning our gains in terms of market 
price — are making all of our economic activity turn upon 
a money computation. 

But other bases and methods have prevailed and may 
equally well prevail again. The times when slavery was 
general were obviously times when there existed quite a 
different property system. There was private property, 
to be sure, the slaves themselves being the property of their 
owners ; but, in fact, the slaves themselves might have been, 
and have at some times been, the slaves of the community 
— the city, village, or state. Slavery does not necessarily 
imply private ownership. So villages have often been the 
owners of the agricultural lands, and in some parts of the 
world they still are so. Much land now — parks, streets, 
sites of public buildings — is owned in common public owner- 
ship. The single-tax people urge strongly that in substance 
all land ought now to be so owned. And, on quite different 
grounds, some socialists urge this same view ; and they go 
yet further; they want all of the instruments and means 
of production, social capital, to be owned in common. Two 
or three hundred years ago, in English Agriculture, some of 

19 



20 THE ECONOMICS OF ENTERPRISE 

the farm machinery, most of the male breeding stock, and 
practically all of the wood and pasture lands were the joint 
property of the residents of the manor. It has long been 
true that in many countries the railroads are public property. 
The forests and the mines and the water powers may at no 
very distant day come to belong to the people in general. 
These things, indeed, may not be far off, even for America. 

Competition merely a present institution. — It is no part 
of the present purpose to urge the desirability of all or any 
of these changes, but simply to point out that little that is, 
in the present social and economic order, has long been as 
it now is, that much of it has not been at all, and that little 
of it is fundamental or sure to last. Private property, in- 
dividual initiative, competition, the money system, and pro- 
duction for the price market are mere present adjustments, 
no one of which has always been, or is everywhere now, or is 
certain to remain. Each order becomes old and changes, 
and nothing in human life is certain but this process of change. 
And nothing of it all is right or just or good in the sense that 
it must endure, or that something else may not better take 
its place. 

"Fair virtues waste with time; 
Foul deeds grow fair thereby." 

One form of life prospers by good fighting, another by good 
running away or by good hiding. Fang and venom and 
stink glands in their times and places have their uses. In 
a warlike and predatory society the qualities that are most 
essential, and therefore the most commendable, — qualities 
in the absence of which group survival would be impossible 
— rusefulness and ruthlessness and thirst for blood, — in an 
industrial society occasion its crimes of violence, its feuds, 
its jingo wars, its poisoned foods, its poisoned poisons. That 
modern industrial society has its pirates is not surprising in 
view of the fact that only a few centuries ago piracy was the 
chief business of some of our ancestral races. The Napoleon 
of current finance is the lineal descendant of the tenth cen- 
tury viking. He succeeds now by virtue of the qualities 
which gave success then. But at that time his prowess 



COMPETITIVE ECONOMICS 21 

was socially serviceable ; the intervening years have now 
brought it about that we no longer need him ; rather we need 
to be rid of him. ^Vhat was once predation for group wel- 
fare is now become predation upon the group. The early 
type of prowess is now grown untimely. The best wolf 
for wolf purposes makes an especially bad sheep dog. For 
jungle times the jungle problem calls for jungle qualities. 
Everywhere survival of the fittest means merely the survival 
of the fittest to survive. A sympathetic hyena or a benev- 
olent tiger would be a failure and a misfit for his peculiar 
problems. Institutions likewise are good or bad according 
to the degree of human development and the problems of 
the time. Only that government is good which both gov- 
ernors and governed are fit for. The same form might be 
the best or the worst according to the men and the occasions. 
The need of the present is to develop new virtues and, in not 
a few cases, to get rid of the old. Absolute good there may 
somewhere be, but most good is merely relative good. That 
which is, may be right, but not in the sense that what is to 
come may not be better. 

The competitive order a pecuniary order. — Modern society 
is, then, distinctly a pecuniary society, a society of business. 
Despite the fact that society was^not always pecuniary, — has, 
indeed, been so only for the narrowest margin of years out 
of a long human history, and may remain so only for the 
next short swing of the pendulum in the life of man, — ■ 
the political economy that we must study to-day is the polit- 
ical economy of to-day. Mainly, under present conditions, 
we produce for the market, for exchange, despite the fact 
that a few generations ago the contrary was the truth. And 
at present we produce in the larger part for a competitive, 
impersonal world market. This is the era of free individual 
initiative under private property for private gain. So far, 
indeed, is this the truth that even combination and monopoly 
may be regarded as merely secondary aspects of competition 
and of individual initiative. Strike this fact of competition 
at its very center of tone, and we discover that we are in 
a regime of price. Money is the focusing point of modern 
business affairs. It is the standard of values simply because 



22 THE ECONOMICS OF ENTERPRISE 

in a society producing for exchange it is the one established 
intermediate commodity. Therefore, as medium of ex- 
change, it is the standard of immediate and of deferred 
payments. Through credit, the money economy lays hold 
upon even the distant future. Thus to object that more 
and more, as society has advanced from a society of isolated 
production through a barter economy to a money economy, 
it is now moving over into a credit economy, is really to 
assert merely that in new and marvelous ways money is 
taking on a still greater emphasis. More and more, and more 
and more exclusively, and over an ever widening field of 
human effort, human interests and desires and ambitions 
fall under the common denominator of money. Doubtless 
many of the best things in life do not get bought and sold. 
Some of them are not exchangeable ; and not all things 
that could be transferred are men weak enough to sell or other 
men strong enough to buy. Not every man has his money 
price. But most good things do, in greater or less degree, 
submit to the money appraisal. Health is easier for him 
who can take his ease and who has the wherewithal to pay 
for good foods and medicines, to travel, to employ good 
nursing, and to command capable physicians and efficient 
surgeons. And, in their degree, also, love and pity and 
respect and place, are bought and sold upon the market. 
It takes a goodly number of dollars to get a child safely 
born, and even more dollars to achieve for one's self a re- 
spectable burial. Much money is power over many things. 
Money is the standard of value in the sense that all values 
of all exchangeable things are expressed in terms of it. And 
this holds, not only of all commodities and services, but of 
all incomes and of all capitals. The capital of a banking 
house, or a factory, or a railroad company is not a congeries 
of tangible things, but a pecuniary magnitude — so many 
dollars. All economic comparisons are made in money 
terms, not in terms of subsistence or of beauty or of artistic 
merit or of moral deserving. This same standard tends to 
become also the test and measure of human achievement. 
Men engage in business, not solely to earn a livelihood, but 
to win a fortune in a pecuniary sense. To win by this mone}^ 



COMPETITIVE ECONOMICS 23 

test is to certify one's self tangibly and demonstrably as 
having scored in the most widespread and absorbing of com- 
petitions. Is one a great artist — what do his pictures sell 
for? Or what is the income of this leading advocate? or 
of that famous singer? How great are the author's royal- 
ties? The pecuniary standard tends to be carried over into 
non-pecuniary fields. 

It is almost past belief how far both in degree and in direc- 
tion money valuations pervade all our thinking. Cheap- 
ness is prone to be synonymous with ugliness, richness with 
beauty, elegance with expensiveness. No one can tell for 
himself where the really aesthetic begins and the sheer pe- 
cuniary ends. In the field of morals, also, the so-called 
cash-register conscience is an actual thing. And one might 
go still further and note that almost all great political issues, 
and almost all absorbing social problems, and almost all 
international complications rest upon a pecuniary basis. 
Our national problems are tariff, labor unions, strikes, money, 
trusts, banking, currency, railroads, conservation of resources, 
shipping, taxation. Success in elections, in the selection of 
senators, in the making of laws, and in the selection of judges 
is prone to be desired for financial ends and to be decided by 
pecuniary means. Diplomatic complications hinge upon 
trade connections, the open door, fisheries and sealeries, 
colonies for markets, and spheres of influence for trade. 
Navies are trade guardians and trade auxiliaries. Elimi- 
nate from local politics the influence of the public service 
corporation, of the contractor, and of the seekers for special 
pecuniary privileges, and what is left of the municipal prob- 
lem will be mostly the pecuniary nexus of the slum with the 
ballot box, of the saloon with the police system, and of saloon 
and slum and brothel with the city hall. 

And now we are belatedly ready for a few definitions techni- 
cally formulated for economic purposes : 

Money is the intermediate commodity for which goods are 
commonly sold. 

The price of any specific thing (good) reports its exchange 
relation to money. 



24 THE ECONOMICS OF ENTERPRISE 

The value of any specific thing reports its exchange 
relation to any good, money or other. 

That is to say, price is a particular instance of value. 
Both value and price, therefore, are methods of expressing 
the exchange ratio between two different goods quantitatively 
specified. Price is merely a particular instance of value — 
the case where one of the exchanged goods is money. So we 
say that the price of a particular horse is $100, and that the 
value of this horse is two particular cows, or two cows of a 
certain definite grade; or is twenty particular sheep, or 
twenty sheep of a certain definite grade ; or is a certain 100 
pounds of wheat, or 100 pounds of a certain definite grade. 

The field of economic science. — The time has arrived, 
also, for a definition of Political Economy in the present 
competitive order. But first it must be noted that no science 
is to be delimited by the nature of its subject matter. Test 
this by finding, for example, from the point of view of how 
many sciences you may discuss a stick of wood. Pretty 
much any fact may form part of the subject matter of pretty 
nearly every science. All knowledge is somehow or other 
related to all other knowledge, and every fact to every other 
fact — since this is a real universe in which we live, an or- 
ganized, interrelated whole. Man's commercial and indus- 
trial activities, his business of getting a living, are in countless 
points of contact with questions of social morality and of 
physical health ; with qjestions of pedagogy and of juris- 
prudence ; with chemistry and physics ; with religion, 
criminology, and penology ; with psychology, sanitation, 
bacteriology, and dietetics. Geography is handmaid to trans- 
portation. Geology discloses the gold and silver mines. 
Astronomy may hide the secret of droughts and famines. 

That which delimits a field of science is, therefore, not the 
field of facts treated, but the purpose for which the facts are 
treated — the point of view or of approach, as determined 
by the central problem under investigation. As political 
economists we have small concern, then, with the Australian 
ballot law or with the popular election of senators ; ours is 
not the problem of government. Nor shall we investigate 
the chemistry of dyestuffs, or the physics of waterfalls or 



COMPETITIVE ECONOMICS 25 

of steam, or the problems of the electric motor. Yet we 
must do all this were the political economy of present so- 
ciety rightly defined as "an inquiry into the nature and 
causes of the wealth of nations " (Adam Smith) ; or as the 
" science of the production and distribution of wealth " 
(J. S. Mill) ; or as the study that " examines that part of 
individual and social activity which is most closely con- 
nected with the attainment and with the use of the material 
[?] requisites of well-being " (Marshall) ; or as an " inquiry 
concerned with the production, distribution, and exchange 
of wealth and services " (Sidgwick) ; or as the science that 
" deals with those activities of man which are directed toward 
securing a living " (Bullock) ; or as " the study of the ma- 
terial world and of the activities and mutual relations of man 
so far as all these are the objective conditions of satisfying 
desires " (Fetter) ; or as '' the science which treats of those 
social phenomena that are due to the wealth-getting and 
wealth-using activities of men " (Ely) ; or as " the social 
science that treats of man's wants and of the goods upon 
which the satisfaction of his wants depends " (Seager) ; 
or as the " science of man in his business relations to wealth " 
(Seligman). Better than any of these, as hinting at the exist- 
ence of a point of view or of a central problem, is Johnson's 
formulation : " Economics is the science which deals with 
wealth in its most general aspect ; namely, its value aspect." 
Still better, perhaps, is the following : The science that 
treats phenomena from the standpoint of price; — therefore, 
mostly, industry and business. 

It is, in fact the value problem, — or more specifically 
and more accurately for present society, — the problem of 
market price, that is the central and unifying problem of 
present-day economics. Price, then, must attend and char- 
acterize all things that are economic ; and all things so at- 
tended are so far economic in character. And more things 
than those which accurately are material must fall within 
the scope of price. Price extends its sway to the utmost 
limits of whatever is property, tangible or intangible, — 
whether material or immaterial. Property covers — and 
therefore price covers — debts, good will, franchises, — every- 



26 THE ECONOMICS OF ENTERPRISE 

thing that is bought or sold. Price includes also many non- 
property facts — human services, such as the goods for 
which payment is made to the actor, preacher, teacher, or 
singer. And, by the way, all efforts or processes are 
economically productive for which a price is so paid or which, 
directly or indirectly, enhance the price. But more of this 
later — grievously more. 

It has been the purpose of this chapter to exhibit the 
present economic system as one of private gain in terms of 
price, of private property, and of production for sale in a 
price market — a system in which success or failure presents 
itself as a computation of price income against price outgo ; 
to show that private property is in the main a modern phe- 
nomenon — an institution that has already greatly changed, 
is undergoing constant change, and that conceivably may 
I some day disappear ; to deny that there is anything neces- 
j sarily fixed or fundamental in the price system or in so-called 
' economic laws, other than such fixity as may attach to the 
environment and to the character capacities and needs of 
human beings ; but nevertheless to make clear that the task 
before us is the study of the situation as it actually is, with 
small attention to its genesis, excepting so far as its past 
may throw light on its present, and entirely without atten- 
tion to conjectural or probable future modifications ; and 
finally and especially to emphasize the warning that this 
conscious delimitation of our field and our problem must 
not imply either permanence or impermanence, merit or 
demerit in the things that we study. 

The chapter to follow will show thac the key to the under- 
standing of the various problems of the competitive price 
regime is the theory of price itself ; that wages, rents, 
interest, and all other economic incomes and compensations 
are price facts, and appeal for their explanation to an analysis 
of the general principles of price ; that, in its theoretical 
aspects, the science of Economics is, indeed, but little more 
than a study of price and of its causes and its corollaries; 
that the various costs in the production of commodities are 
items of price; that each good produced is commonly and 
typically the joint product of various cooperating factors, is 
subjected to the price appraisal, and is significu,nt as a prod- 



COMPETITIVE ECONOMICS 27 

uct only in the degree of its commanding a price ; and that 
the process of apportioning a joint product of price among 
the producers of it — the great distributive problem — ■ 
resolves itself into a series of subordinate or collateral prob- 
lems of price; that none of these problems is ethical in 
nature ; that the economist's business — as economist — 
is not the formulation of moral standards or the making of 
moral appraisals. And, finally, it will again be emphasized 
that, as there is nothing necessarily permanent in the facts 
with which the economist has to do, or in the economic 
system under which these facts are organized, so there is 
nothing necessarily ultimate or enduring in the science 
which treats of these facts; that its generalizations hold 
only relatively to the facts which it discusses ; but that 
nevertheless some few of its generalizations must seemingly 
hold for all of the different possible forms and conditions of 
organization. 



CHAPTER III 

THE REGIME OF PRICE — Continued 

Price the pivot of industry and business. — We have seen 
that precisely because the present economic hfe is organized 
upon lines of private property, of pursuit of individual gain, 
and of production for exchange, it is inevitable that the cen- 
ter about which all economic activity revolves is the medium 
of exchange, the price standard. It is this fact which in 
turns fixes the problem of price as the central problem and 
the organizing interest of current political economy as a 
science. The proof of this is, however, mostly to be found 
in that constant return to the price problem which we shall 
find inevitable as we approach, one after another, the subor- 
dinate problems of the science. And these problems will, 
in turn, declare their subordinate character by this very fact 
that they are only to be solved by an appeal to the analysis 
and the laws of price. In the fact that anything sells at all 
in the present economic order is implied its sale in terms of 
price. Wages, for example, are the price of the services of 
employed labor ; profit, the price reward of the independent, 
self-employed laborer (the entrepreneur, enterpriser; Unter- 
nehrner, or imprenditor) ; rent, the price commanded by 
property lent in time for hire ; interest, the per cent which 
the time use of wealth, in terms of price, bears to the total 
price. Each of these is a price quantity or item, and each 
presents itself specifically as a problem of price adjustment. 

Price the pivot of distribution. — And still further : All 
distribution takes place as a price process. Each particular 
product is a price item and is due to the joint employment of 
different human agents and of a wide range of instrumental 
or property items — land, machines, raw materials, patents, 
franchises, and the like. The price of the joint product — • 

28 



COMPETITIVE ECONOMICS 29 

not the product as such — is the amount which is to be divided, 
distributed, among the various cooperating factors ; and each 
of these factors, as we have seen, receives its distributive 
share as a price quantum. Not only, then, are the forces 
and processes under which and by which the sale price of 
the product is adjusted and determined to be studied as 
particular problems in the theory of price, but also the dif- 
ferent distributive shares derived from it are equally price 
problems. Many economists, it is true, contend that the 
price of the final product, of the consumable good, must 
be regarded as the cause of the distributed price shares. 
Other economists insist that the payments made for the 
labor, the instruments, etc., — price items, — are, as costs 
of production, the causes of the value of the jointly produced 
price product. To which view, if with either, the truth is 
accurately to be ascribed, we need not now debate ; it is 
enough to note that this is an issue to be solved only as a 
problem in the theory of price. Costs, products, and distribu- 
tive shares are price facts and are somehow related ; and 
this relation is a relation of one class of price items to an- 
other class of price items. 

The science of economics and the art. — It must, however, still 
be held in mind that, in a society differently organized in its eco- 
nomic life, the central problem of political economy and the deriva- 
tive and surrounding problems might be quito diffe- ent. Our classi- 
fications and generalizations and principles and laws must be 
constructed and formulated to fit the needs of an analysis of a com- 
petitive, entrepreneur, private-gain, and private-profit society, in 
which production is prevailingly and typically production for ex- 
change, and in which in turn exchanges take place through money as 
an intermediate. Our explanations will best run in terms of the 
process as it actually takes place. We ask not primarily what ought 
to be, but what is. We are — in the first instance, at any rate, and 
as economists — set to search out the objective facts, to analyze and 
synthesize and generalize these facts and their sequences and their 
processes. At this stage of the study — the science of it rather 
than the art — our business is not to approve or to condemn, to 
regret or to indorse, to commend or to denounce, but only to make a 
coldly unsympathetic, impersonal, and objective report of the actual 
ongoing of things. Defense, apology, or condemnation are no 



30 THE ECONOMICS OF ENTERPRISE 

part of our business. After we have learned what we can of the facts 
— but not till then — will the time have arrived for passing judg- 
ments of approval or of disapproval. Then may the results of our 
work be handed over to the social philosophers; or we ourselves, 
Heaven so willing, may assume this role and may undertake the 
task of philosophical or ethical or sociological appraisal. As the 
final step of it all, we may, perhaps, be able to decide what things 
are good in all this vain life of shadows, and may come to approve or 
to condemn, may recommend, may set ourselves to modify, amend, 
abandon, substitute. But the economist, as such, has no criteria 
by which to test the worth of what he finds. As economist, his 
business is solely with the facts : Trojan and Tyrian stand in equal 
estimation with him. For close thinking, science and art must be 
kept separate — the " world of description " from the " world of 
appreciation " — facts from appraisals. This is, to be sure, a scien- 
tific ideal, rarely attained, and violated especially often in the social 
sciences — measurably often also in the present book — but violated 
always at some hazard to scientific truth. 

Economic doctrines valid only in appropriate conditions. — As 
part, then, of this clear thinking, it is necessary to recognize not 
only that the social organization might be very different from the 
present, has been so different, and will probably with passing cen- 
turies again and again become different in many diverse ways, but 
also that the economic doctrines valid and adequate for existing 
society must, perforce, in other conditions fail of adequacy, as these 
conditions may be fundamentally different. Not that each decade 
or each century had its separate system of classifications and general- 
izations and principles . this is not necessarily true — can, indeed, be 
true only so far as the fundamentals of human life may change. 
Most cf wh.at is valid now in economic analysis will continue to be 
valid so long as our society remains a society of private profit, 
individual gain, and production for the price market — - will remain 
valid; that is, in such fields of our economic life as retain these char- 
acteristics, and in the degree of their retention. Even with the pres- 
ent national post and with the possible state or national railroads, 
some share of the economics of competitive production holds good, 
since these public activities buy their labor and supplies in the open 
market and sell their services at a price. 

But any of the other possible radically different types of or- 
ganization would necessarily have its corresponding different 
central problem. All science is essentially pragmatic : its prob- 
lems organize its thinking. Thus, definitions and classifications 
are good or bad according to the purpose of the particular in- 



COMPETITIVE ECONOMICS 31 

vestigation in hand. Precisely, however, for this reason they are 
not arbitrary. 

Thus if one were to ask how much of current economics would be 
valid for a systematic socialism, — it being assumed that sociahsm 
means a common partnership in the implements of production 
(social capital), the operation of these for common account, with 
some sort of administrative division of the aggregate consumable 
product, — it must be admitted that the saUent features of our 
competitive price economics would disappear. What might be the 
theoretical economics of socialism it is difficult to formulate. Money 
and price would seemingly have no place — at least no necessary 
and central place. Exchanges, if any remained, would be merely 
incidental and sporadic, or occasional, and, in any case, non-essen- 
tial. On the one side, economics would shade off into administra- 
tive theory, a sort of political science. Seemingly, however, its 
central and unifying problem would be that of utility rather than of 
market value or price. And it is even more difficult to surmise what 
might be the science of economics for ants or bees or peccaries — ■ 
their wirtschaftliches Leben. But something of the sort there might 
reasonably be, must indeed inevitably be, were there intelligence to 
construct the scientific generalizations. Likewise the aspirations 
now called Home Economics and Agricultural Economics have in 
them the possibilities of real sciences. So, also, doubtless, of 
Sociology. 

Nevertheless — and this is the immediate goal of the argument — 
much that belongs to any human economic system must be common 
to all systems that are human. There will, for example, always 
remain the fundamental fact of human need and desire ; there will 
always remain the dependence of aggregate consumption on aggre- 
gate production ; and there will always remain the twofold depend- 
ence of aggregate production upon the efficiency of man and upon 
the quantity and quality of his instrumental equipment. 

To summarize : The competitive economy is an exchange 
economy, and therefore a price economy. Production 
takes place typically for the purposes of sale. Gain, there- 
fore, is sought in terms of price, and accrues in terms of 
price : All economic purposes and methods take on the price 
emphasis. Price becomes the central and pivotal fact in 
all industry and business. The theory of price is thus the 
core of all economic theory ; the rest is corollary or appli- 
cation. Thus price presents itself in the competitive order 
as the unifying and organizing interest and problem of the 



32 THE ECONOMICS OF ENTERPRISE 

science, the point of view with reference to which the eco- 
nomic field is dehmited and its horizons fixed. 

It will be the task of the next chapter to bring into clear 
view that fundamental fact or force which, in the competitive 
order, imposes the necessity of trade; makes imperative 
the existence of a medium of exchange ; stamps the competi- 
tive regime as inevitably a price regime, and organizes all 
economic activity about the medium of exchange through 
which the exchanges take place. The ultimate and directive 
fact in the case will be shown to be the specialization of 
economic functions, — what is sometimes called the divi- 
sion of labor, — the assignment of productive activity to 
capacity and to favoring opportunity. Trade is merely the 
competitive method by which the attendant advantages are 
secured. But it will also be made clear that neither in im- 
portance nor in attainability are these advantages peculiar 
to the competitive regime. Other types of organization 
might offer the same advantages, obtaining them, however, 
by different methods. Trade and money are merely ad- 
justments for making specialization of function possible in 
a competitive society. Trade and money are thereby the 
characteristic traits of the actual economic order ; and money 
is the pivotal fact in trade. 



CHAPTER IV 

SPECIALIZATION AND TRADE RELATED TO MONEY 

Specialization, interdependence, and efficiency. — The 

forms of life of very simple structure rank as the lower orders, 
not because complexity is in its nature preferable to simplicity, 
— for with many things the contrary is the truth, — but 
because with the higher forms of life a greater efficiency goes 
with increasing complexity. The single-celled organisms 
are all mouth for purposes of ingesting food and all stomach 
for purposes of digesting ; they are all locomotive apparatus 
for purposes of moving, all reproductive apparatus for pur- 
poses of multiplication, all sensory apparatus for the receipt 
of stimulation. Lacking specialized parts and functions, 
the correspondence to environment is limited in extent and 
defective in Idnd. Only the simpler and more commonplace 
adaptations are possible. Emergencies fail of appropriate 
provision. With greater specialization of function goes 
greater effectiveness of function, an ability to take advantage 
of a wider range of facts in the environment and to adjust 
to a wider range of emergencies. Efficiency for the purposes 
of life grows with the development of special organs and 
special adjustments for the accomplishment of special 
things. In the selective process, increasing specialization 
means increasing advantage in the struggle for life. 

This law of development by specialization is widely illustrated 
in many fields of life and on many levels. Nor are illustrations and 
analogies lacking outside of the biological field : in astronomy, in the 
slow emergence of suns and planets and satellites, each with a defi- 
nite path and specific share in the maintenance of this stupendous 
moving equilibrium ; in history, in the formation of castes and 
classes ; in political science, in the subdivision of the primitive 
king-function of priest, judge, war chief, and executive into the 
various functions of parliaments, courts, field marshals, and ad- 
D 33 



34 THE ECONOMICS OF ENTERPRISE 

ministrative bureaus; in linguistics, in the slow differentiation of 
the amorphous yelp or cluck or grunt — the exclamation, speech 
without parts, word protoplasm, so to speak — into the various 
specialized, cooperating functions together making up the sentence. 

But perhaps the best illustrations of this principle of spe- 
cialization of function — illustrations which are particularly 
to the present purpose — are to be found in the field of po- 
litical economy. To understand the necessity of a medium 
of exchange, a money, in human affairs, we must under- 
stand the importance of trade. To measure the impor- 
tance of trade, we must appreciate the significance of spe- 
cialized activities. To this end, we must realize that men in 
society are interdependent, and that they are in society 
precisely because they are by nature interdependent, there 
being no welfare for any individual but in association with 
his fellows. We must understand also that it is only through 
the specialization of economic functions that this inter- 
dependence can assume the guise of a surpassing good fortune. 
So much having been made clear, the next step will be to rec- 
ognize that, in actual society, the possibility of specialization 
not only makes necessary the institution of trade but also 
depends on that institution. And finally it must be made 
clear that trade, to be really practicable, requires and assumes 
an exchange medium, an intermediate in trade, a money. 
And having by these separate steps arrived at our argu- 
mentative goal, we shall so far be prepared to realize the 
ultimate nature of the price regime in which we live, the 
forces behind it, the significance of it, and, in some small 
part, the manner of its functioning. 

Isolation imposes inefficiency. — The lot of the pioneer is 
necessarily a hard one. Unable to trade, and therefore 
unable to specialize his activities, he is compelled to be in- 
efficient. The new continent, with its wealth of new re- 
sources, its expanse of unexhausted lands, its store of un- 
cared-for fruits, its teeming life for sport and food, may seem 
to assure to him a position of ease and plenty. The wide 
ranges of land do not, it is true, offer unlimited opportunities 
and bounties, but, in comparison with his necessities, the 



SPECIALIZATION, TRADE, MONEY 35 

supply far outruns the need. But, though he obtains his 
food easily, it is only during a part of the year. He needs 
also to harvest and to store. He must have shelter. After 
a fashion, of course, he may be his own carpenter, smith, 
shoemaker, weaver, and tailor. But even so, there will 
remain the need of hunting appliances, and of powder and 
ball. Shorn of all that he brought with him and cut off from 
all touch with his fellows, the existence of the pioneer would 
be well-nigh impossible. At the best, even though his food 
lacked nothing in volume, it must be grievously restricted in 
variety. Most things he must get along without — the prod- 
ucts of distant lands, and all those goods dependent for their 
production on extended manufacturing plants with their 
costly equipment, their multitudes of employees, and all 
their various but concurrent lines of skill. No man is, in 
fact, sufficient for his own needs in any adequate measure. 
Fortunately for humanity, men depend for their welfare 
mostly upon one another. One must live among his fellows 
or must suffer. Too sparsely inhabited countries are never 
prosperous. That costly thing, transportation, absorbs 
overmuch of their resources. 

In the larger part, therefore, the productive abilities of 
the isolated man are wasted. Men in society differ as 
widely in aptitudes for production as do zones and continents 
in natural resources. Unless each man in society specializes 
in productive activity, the wastes of productive power must 
be no less than would attend his isolated state. For pro- 
ductive purposes, indeed, each man would still be isolated. 
That one thing, or those few things, that he could do well 
he must not do. Much he must do that he would far better 
let others do for him. Jack at all trades, he is necessarily 
master of none. His own welfare, therefore, and the wel- 
fare of his fellows demand that each member of the society 
follow the line of his especial aptitude so far, of course, as 
his activity is socially useful. Each then produces a surplus 
of his peculiar product ; a surplus which he can exchange 
for the surplus of others. Thereby a larger product accrues 
to society as a whole and a larger total of consumable goods 
to each individual member of society. 



36 THE ECONOMICS OF ENTERPRISE 

Specialization and industrial organization. — This is the 
principle and the method of what is known as the division of 
labor, specialized production, working out into a wide variety 
of trades and professions, and into the minute subdivisions 
of processes, the complicated organization, and the vastly 
cheapened processes of the great factories. Even in the 
day of Adam Smith, a century and a half ago, the making 
of a pin involved eighteen distinct operations, each requir- 
ing its different specialized laborers. 

This wide specialization of industrial functions involves, 
it is evident, an extreme dependence of each producer upon 
his fellows. The shoemaker would starve without the farmer 
and freeze without the carpenter and the tailor. In some 
of its activities, our present system is therefore a system of 
unconscious, but widespread and effective, cooperation. 

Competitive specialization requires money. — It should 
now be clear that in the economic life, as in biology or as- 
tronomy, specialization, interdependence and cooperation 
are merely different phases or aspects of one process — a 
process involving a redistribution of functions in production 
and making possible an enormous increase in the aggregate 
of products, requiring therewith — in the competitive system 
— an exchange of products between individuals, and making 
almost imperative the use of a common medium of exchange. 
The entire process, in each of its different aspects, is, indeed, 
one among many illustrations of the intellectual adaptation 
of each man to his environment. 

Regional specialization and trade. — Nor are the advan- 
tages of specialized economic functions limited to the rela- 
tions between individuals in the same society. They are 
equally manifest in the relations of nations or societies to 
one another. Division of labor takes place between countries 
and zones. International specialization involves and illus- 
trates the economic interdependence of societies and is 
conditioned on the possibility of international trade. Pre- 
cisely as with specialization among individuals, interdepend- 
ence and specialization must go together and must achieve 
their advantages through trade. To place obstacles in 
the way of any one is to interfere with the others and to 



SPECIALIZATION, TRADE, MONEY 37 

forego the advantages which together they offer. Through 
trade each country and zone shares in the products and the 
good fortune of every other. And between countries, 
as between individuals in any country, these advantages 
are more easily achieved with every improvement in trans- 
portation and are achieved in ever larger measure. To re- 
strict trade is parallel to making transportation more diffi- 
cult; it is to interfere with the international specialization 
of economic activity. 

Only competitive specialization requires trade and money. 
— It should now be obvious that the advantages of special- 
ized production are not peculiar to the competitive organiza- 
tion of society. They might be equally great in any other 
economic order. A slave or a feudal economy or any pos- 
sible cooperative or socialistic society would find equally 
imperative the organization of its productive power into 
specialized activities. Possibly also, some other form of 
organization than the present may some day prove to be a 
better way of working out this problem of specialization. 
Trade is, at any rate, only one of the possible ways, and 
among the different possible ways may not be the best. It 
is, in fact, not the specialization of functions, but only the 
competitive manner of organizing this specialization, that 
imposes the necessity of trading. Trade is the competitive 
way of making specialization possible. But trade is purely 
a competitive phenomenon, a mere adjustment, important 
only in the competitive order, though in this order char- 
acteristic and central. Accurately, indeed, trade is not 
something permitted by competition or imposed by it or 
derived from it : it is competition, the heart of it, its central 
characteristic fact. It follows that it is trade and not spe- 
cialization that implies and imposes the practical necessity 
of money. Any intelligently ordered society will have the 
specialization ; it is only the competitive society that re- 
quires also the trade and the money. It is upon trade that, 
in a competitive society, all the advantages offered by spe- 
cialization depend. And trade demands a medium for its 
transaction, a money. Once there is the money, society is 
in the regime of price. 



38 THE ECONOMICS OF ENTERPRISE 

Barter and exchange media. — Doubtless there are evils 
enough, both incidental and intrinsic, attendant upon the 
regime of price, the pecuniary organization of society. 
JBut so, also, are the benefits great. It is peculiar to the 
I competitive societj^ merely that it resorts to trading rather 
than to seek the solution of its problem through the dis- 
/tribution of its product by lot or by other administrative 
device or decree. A competitive society must perforce be 
a pecuniary society, or must forfeit the measureless advan- 
tages of its automatic cooperations in the great give and take 
of trade. To forego the use of money would be to revert to 
the system of barter. In no essential way, however, would 
this modify or palliate the existing situation, but would 
merely increase the difficulty and the friction of it. 

Nor, in the last analysis, would the system of barter mean 
the absence of a medium of exchange, but merely the multi- 
plication of media. Value relations would exist as at pres- 
ent, but no price system — that is, no one medium of 
exchange. Instead, there would be an indefinite multiplica- 
tion of media. The possessor of any particular good for 
sale would rarely come upon a man having the wanted thing 
and wanting the offered thing. Thus, by trading and re- 
trading, possessors of commodities which they desired to 
exchange would finally acquire command of the particular 
commodities exchangeable against the particular commodity 
desired. That is to say, each man would, as his necessities 
should dictate, be employing a medium of exchange, an 
intermediate between the wares for sale and the commodities 
desired by him ; but this intermediate would be for different 
men, and for each man at different times, a different medium.* 
A money economy has established itself only when one com- 
modity has been conventionally specialized to serve as the 
common intermediate of exchange and so as the common 
standard of value. 

Goods as demand for one another. — But, evidently, in 
the absence of money the demand for any particular good 
must always be made up of the offer of other goods. Goods 
would furnish the demand for goods. The exchange process 
would establish value relations, but not price relations. 



SPECIALIZATION, TRADE, MONEY 39 

The more goods of each sort, the more demand for goods of 
other sorts. All demands and all supplies would be embraced 
within the total of product. Supply of some goods would 
function as demand for other goods. Total supply of prod- 
ucts and total demand for products would be merely different 
ways of looking at the total of products. Viewed in this 
large way, then, aggregate demand and supply are one and 
the same thing, — the social dividend. 

The money demand for any one good. — In the money 
economy the facts remain essentially the same, but become 
more manageable. There are many different possessors of 
many different sorts of goods, each of whom, we will say, is 
disposed to replace some particular item of his goods with 
a hat. But no one of all these various possessors of goods 
is likely to look for a man with hats to trade. Nor, if he 
looked, would he be likely to find any man having hats and 
desiring the particular thing offered for them. All the men 
demanding hats will, therefore, as the first step in the ex- 
change process, translate some part of their holding of goods 
into a holding of money. The various unhomogeneous com- 
modity demands for hats will thereupon have coalesced into 
a homogeneous money demand. Only price offers, not offers 
of goods, are to be set over as demand against the supply of 
hats. The market price of hats — the value of hats in terms 
of the money commodity — is the adjustment point between 
these money demands for hats and the supply of hats. The 
supply of hats is also presented in money terms — is essentially 
a demand for money on the part of the owners of the hats. 

And precisely so with any other commodity that arrives 
at its market standing in terms of price. Doubtless other 
value relations exist, — corn to cloth, wheat to shoes, horses 
to corn, corn to shoes, — but each of these commodities 
attains directly to its market standing through the process 
by which it is awarded its money price. The value rela- 
tions between the different commodities are thus arrived 
at through comparison of their prices. The direct setting! 
of the different commodities over against one another fori 
value adjustment is possible, of course, but rarely occurs, 
barter is uncommon. 



40 THE ECONOMICS OF ENTERPRISE 

It is not, however, to be inferred that necessarily, or even perhaps 
commonly, when men market their goods against money, there is a 
distinct and definite purpose to apply the selling price to any specific 
line of purchase, hats or other. One often sells his goods for money 
in the belief merely that the money obtained will, earlier or later, 
buy for him an indefinite something more to his purpose than the 
thing he sells. 

Nor is it to be inferred that the possession of money is necessarily 
due to the sale of some article previously possessed by him who has 
the money, or by any one else. The money may have been given 
him ; or he may have inherited it ; or have obtained it by a pension, 
or by gambling, or by stealing. It is to the present purpose merely 
that he has it. 

Nor, in fact, need his holding of purchasing power be necessarily 
in the form of actual tangible money. One often has a money 
credit at the bank against which one draws his check. Nevertheless, 
the credit is something that runs in terms of money, is equivalent to 
money, and functions as a money demand in the market process by 
which the price is adjusted. And this is sufficient for the present 
purpose ; for the time being we shall treat this credit as actual 
money. 

The examination so far made of the competitive system, 
the regime of price, has already sufficed to show that, even 
under competitive conditions and, indeed, by the very nature 
of these conditions, men are essentially cooperative and inter- 
dependent in their productive activities ; that their antago- 
nisms attach solely to the price aspects of the competitive 
system, its trading process, and manifest themselves in the 
effort to obtain through trading the most possible for the least 
possible; that precisely as specialization in a competitive 
society creates the need to trade, so the possibility of trade 
is the permit to specialize, trade and speculation being, there- 
fore, mutually conditioning facts ; that actually, even if not 
by imperative necessity, trade requires and imposes the 
employment of money ; and, finally, that all the demands for 
any particular thing on the part of the various possessors of 
other things present themselves as sums of money offered for 
the particular thing; demand, in the money economy, is 
money demand. 

The topic, then, which is next to require our attention is 
the process by which the supply of any given good is equated 
against the money demand for that good at the point of ad- 



SPECIALIZATION, TRADE, MONEY 41 

justment termed the market price. What is the relation of 
the quantity of the supply to the price ? What the relation 
of the various prices which the different holders demand for 
their goods ? What the relation of the usefulness of a good 
to the prices which different men will pay for it, the different 
demands ? And what is the relation of these different de- 
mands to the price ? 



CHAPTER V 

THE ADJUSTMENT OF PRICE 

Price-making as the outsider sees it. — An onlooker at 
an auction, or a visitor at the Stock Exchange or the Board 
of Trade, would observe that there are present both bidders 
for goods and offerers of goods, and that the trades or sales 
take place at a price which is agreed on in the process. He 
would further note that if, on the Board of Trade, the selling 
side of the market is offering more supply than the buying 
side is willing to take at the ruling quotations, the prices 
will go down. If, on the other hand, the buying orders are 
coming in relatively fast, they will probably be found impos- 
sible of execution without forcing the prices up. On days 
of an active market, prices may rise or fall often and sharply 
— fluctuating possibly from hour to hour or even from mo- 
ment to moment. Every price level is, for its particular 
time, the point at which the supply and the demand arrive 
at an equilibrium. Doubtless many of the buyers' orders 
have given authority to pay, if necessary, a higher price 
than is actually paid ; and many of the sellers' orders have 
fixed a lower limit to the selling price than it has actually 
been necessary to sell at. But the onlooker sees none of 
these mere possibilities. He observes only bids on one side 
and offers on the other, and notes that, as the bids are higher, 
more wheat is offered for sale, or that, as the prices rise, some 
men drop out of the bidding — and that, as the owners are 
more anxious to sell and find no buyers, they either stop 
shouting their wares or accept lower prices. It is obvious 
to him that higher prices attract more sellers, and lower 
prices more buyers — that more bidders at the price make 
the prices higher, and more sellers, the prices lower. And 
all this is intelligible to him without more knowledge of the 

42 



THE ADJUSTMENT OF PRICE 43 

dispositions of either buyers or sellers than is manifest from 
what he can see and hear. It is evident that each selling 
broker is trying to sell on the most favorable terms that he 
can get, and may, in the execution of his orders, shout a 
series of selling offers that no one accepts, and may possibly 
before he actually sells have several times lowered his selling 
terms. The buyers also are trying to buy as cheaply as 
possible, and may little by little bid up before a purchase 
is closed. Part of the technique of trading is obviously to 
offer no better terms than are necessary. 

What the outsider may infer. — The onlooker, however, 
observes only the sellers' offers and the buyers' bids, and has 
no knowledge of what other offers or bids there may be 
still to be disclosed. He knows merely that the market 
price is the price at which are being equated such offers of 
price and offers of goods as are made, and that there are 
these actual demand prices against other actual selling 
prices. He may, indeed, infer that what the different traders 
on either side have " up their sleeves " will probably deter- 
mine the direction of the next fluctuation in the market. 
But he sees only that the market price at any instant is the 
price that equates the different demands, at their respective 
prices, with the offered supplies at their respective prices. 
The actual price at any instant is fixed by the demand bids 
as they are and the supply offers as they are, and by nothing 
else — by the actual rather than by the potential facts. 
When the potential becomes the actual, some other market 
price may come to be the actual price. 

The view of any actual trader. — Something like the fore- 
going situation exists when two men are bargaining for the 
sale of a horse. Behind the observed facts something like 
the same range of hidden facts must be present. The bids 
of the prospective purchaser are intended to give the scanti- 
est possible information as to how high he will go ; his earlier 
higgling, indeed, will better indicate how low he thinks the 
owner of the horse may be induced to sell. Each of the 
traders is shrewd to mislead the other as to his own limit. 

But evidently there is a limit — a point beyond which the 
bidder will not go in buying the horse, as there is also a 



44 THE ECONOMICS OF ENTERPRISE 

lower limit to what the owner will sell for — though, often 
enough, neither of these limits may be precisely and definitely 
in the minds of the respective traders. Not only, then, is 
it true that neither trader in the horse trade knows the other's 
limit, and that none of the bidders in the wheat market 
knows the other's limits, and that the observer cannot know 
any of the limits, but it is in addition true that any actual 
buyer or seller may never come under the necessity of deter- 
mining how high, as buyer, or how low, as seller, he would 
if necessary go, but only that he will at least go as far in his 
particular direction as he finds actually necessary for his 
trade. Limits in such cases, none the less, there inevitably 
are ; as such, they mark the bounds within which the trade 
must take place, if it takes place at all. 

The economist's view. — We are not yet prepared to 
analyze the process by which the buyer arrives at his upper 
limit of demand, his maximum paying price, or the process 
by which the seller determines his lower limit, his minimum 
selling price, the price at which he would rather retain the 
property than accept the money. For the time being, it 
must suffice to assume that both of these limits exist. 

Assuming, then, these limits, the economist has more to 
do in analyzing the process by which a market price is arrived 
at than the mere onlooker at a trade or an auction or a market 
is concerned to do or is in a position to do. The observer 
looks at the case purely from the outside — sees it objec- 
tively — as a mere spectacle, and finds no difficulty in under- 
standing it as mere objective spectacle. Price for him is 
the actual adjusting point of the demand offers on the one 
side with the commodity offers on the other side — the equat- 
ing point between demand and supply. The case is even 
simpler for him than a football scrimmage — not much more 
puzzling, indeed, than the level of the scales, or of two con- 
nected reservoirs of water, or the adjustment of a row of 
marbles in a tilted dish. 

But we, as economists, have, in addition, to concern our- 
selves with the psychology of bargaining and with the in- 
fluences that the different traders' limits have on the method 
by which the market equilibrium is reached or is disturbed. 



THE ADJUSTMENT OF PRICE 45 

For the purposes of Economics, then, we go further than the 
onlooker goes or can go ; we undertake the analysis under 
the assumption of a range of facts which must exist, but 
which are not seen by any outsider or, in their totality, by 
any one of the agents in the market process — a prodi- 
gality of knowledge rivaling the inside information of the 
novelist and almost matching his omniscience. We have to 
adopt the point of view of each of the different agents in the 
process rather than that of the mere observer. Nor is this 
change in point of view to be avoided ; for the facts which 
are not seen are alone adequate to explain the facts which 
are seen, the process as it takes place. And later still, as 
the final step in the problem, we shall meet the necessity 
of examining the process by which these maximum demand 
prices and these minimum supply prices are arrived at. 
For the present, however, we are fortunate in having merely 
to assume them. But note again that we assume nothing 
that is unreal or gratuitous, but only a specific situation, in 
order to arrive at a definite analysis. As economists we 
assume only the very facts that the traders are doing their 
best to guess at — a range of actual conditions, which, as 
actual, the traders are conjecturing as best they can. 

Price adjustment at its simplest : Unreserved supply. — 

Market price presents itself as merely the equilibrium point 
between the money demand for a given article and the market 
supply of that article. We shall, therefore, best approach 
this problem of market price upon the assumption, first, of 
a given demand and of a given supply, without inquiring 
why or whence is the demand, or what forces have deter- 
mined the supply. 

Suppose, then, that A is the possessor of a hat which he 
will sell for what he can get, and that X has $5 which he is 
willing to pay for the hat rather than go without it. Evi- 
dently the price may be $5 or it may be anything less. The 
precise terms of the actual trade will be determined solely 
by the skill and guile of the traders. Whatever A gets is 
so much for him of sheer gain ; and whatever less than $5 
X pays is, in a sense, so much gain for him. 



46 THE ECONOMICS OF ENTERPRISE 

But now if, together with X with his maximum paying 
disposition of $5, there be Y with a maximum bid of $4, the 
lower level at which the price can go is fixed at $4 — at some- 
thing, indeed, a little more than $4, since only by so paying 
can X be certain of getting the hat as against Y. The seller 
A, taking only that which the bidding is sure to give him if 
he allows the bidding to work itself out to the utmost — is 
safe to get as much as $4. But between this point and the 
maximum possible price there is still room for the contest 
of bargaining to fix the price ; $4.01 or $4.99 may equally 
well be the point of adjustment — anything more than $4 
and not exceeding $5. 

Suppose now that four hats identical in quality are offered 
for sale at whatever they will bring and that the maximum 
demand prices are $5, $4, $3, $2, $1 ; the competition among 
those buyers fixes the price at from $2 as the maximum to 
anything more than $1. When the bidding passes beyond 
$1, one buyer drops out — evidently l:)ecause, if he must pay 
more than $1 for a hat, he would rather make some other 
use of his money. Since there are only four hats for sale, 
the price must be high enough to exclude one of the five 
bidders — must be above $1 — and yet low enough to find 
buyers for the whole supply — must not be above $2. Within 
these limits, the contest of bargaining, the higgling process 
between buyers and sellers, fixes the actual market price. 

And note now that it would not at all affect the result if these 
different demands, instead of attaching to different men, repre- 
sented the falling disposition of one man to invest in hats. The 
first hat he wants at not over $5. If you are going to sell him a 
second, the price low enough for this will have to be not more than 
$4. True, you might have made him believe you had only one 
hat and have sold this at |5, and later have sold him a second at 
$4 or at SS"*" — just as at an auction, when each sale is a separate 
sale, one man may buy several items of the same thing at several 
different prices. So again, if there were different bidders, separate 
trades and prices might conceivably be made with each separate 
man. But, if it be assumed that there is to result a one-price market, 
the price on all the supply must be low enough to market all of it, 
and all items will, by assumption, sell at the same price. So it is not 



THE ADJUSTMENT OF PRICE 



47 



true that two hats could be sold at a price of $4.50 each, 



5 + 4 



Even with a single bidder this could not be the case, were it true 
that he had the choice to stop with only one item purchased — if, that 
is to say, the sale is per hat rather than per pair of hats. This 
second hat he wants only to the extent of being willing to pay $4 
for it. At the price of $4.50 he will prefer to buy only one ; or, 
if to get one, he were compelled to buy two at $4.50, he would 
rather resell one than retain it at this price : he would even accept a 
price as low as $4"*". 

Supply with reservation prices. — But now we introduce 
a modification affecting the supply side of the situation. So 
far the hats have been for sale at whatever they will bring. 
But suppose now that each owner has his minimum selling 
price. Formerly there were prices at which the buyers 
would rather keep their money than to buy hats ; now the 
sellers also have prices at which they would rather keep the 
hats than to have the money. Each owner of a hat has a con- 
dition attached to his offer of sale — a proviso as to the least 
that he will take. One owner will not sell unless he can get 
$1 ; another unless he can get $2 ; another unless he can get 
$3 ; and the fourth unless he can get $4. 

It is evident, then, that while the buyers have the same 
bidding prices as before, these bidders face entirely changed 
conditions of supply. As the buyers still have limits to 
their bids of money for hats, so now the sellers have limits 
to their bids of hats for money. The buyers, each of whom 
will keep his money unless he can buy at a certain price, 
now meet sellers each of whom will refuse to trade unless 
he can get a certain price. Summarized, the situation is as 
follows : 



Bi's limit of dollars for one hat is 5 
B2's limit of dollars for one hat is 4 
Bs's limit of dollars for one hat is 3 
B4's limit of dollars for one hat is 2 
Bs's limit of dollars for one hat is 1 



Si's limit for hats is one hat for $4 
S2's limit for hats is one hat for $3 
Sa's limit for hats is one hat for $2 
Si's limit for hats is one hat for $1 



Under these conditions what will the price be ? 
At a price of $1, only one item of supply will be for sale ; while all 
the bidders will be disposed to buy. The price will, therefore, have 



48 



THE ECONOMICS OF ENTERPRISE 



to be higher. At |4 there will be four sellers and only two buyers. 
But at $3 there will be three sellers and three buyers. The price 
will, therefore, be $3, since no one wiUing to sell at this price fails 
of selUng, and no one willing to pay this price fails of buying. It is a 
stable equiUbrium.* 

Another view of reservation prices. — The foregoing is the usual 
method of expressing and of solving problems of this sort — a 
method of cut and try in the location of the equilibrium point. A 
better method, however, is disclosed through a further analysis : 

In any market where owners of goods will sell only if they can 
" get their price," and owners of money buy only if they can " get 
their money's worth," it is evident that the men on both sides of 



' Note on Graphs. — Represented graphically, the price is the point 
of intersection of the demand with the supply curve, the demand 

curve being plotted as falhng 
from the left of the page to the 
right and the supply curve as 
rising from the left to the right. 
Rising prices are indicated on 
the vertical line upward, in- 
creasing quantities on the 
horizontal line to the right. 
The foregoing problem would be 
represented graphically as in 
figure (1) opposite. 

The demand curve may also 
be interpreted to report the 
vohime of supply marketable 
at different prices, e.g., one 
article at 5, 2 at 4, 4 at 2. So 
the supply curve may report 
the volume of goods obtainable 




Quan+i+y 
Fig. 1. 



at different prices, e.g., one at 1, 2 at 2, 4 at 4. 

Thus the statement that the demand for a good has increased may 
rightly report (a) that there are the same number of bidders as 
formerly, but each with a higher price bid ; (ft) that there are more 
bidders than formerly at the different prices. But the statement 
cannot rightly mean either (a) that because of lower prices more 
goods may be sold, or (6) that the mere needs or desires for goods 
are now greater. 

Likewise the supply curve may change to mean (a) that the 
same number of goods are offered at different reservation prices, or 
(6) that changed numbers of goods are offered at the different price 



THE ADJUSTMENT OF PRICE 



49 



the market must have made an appraisal of the thing owned 
relatively to the thing offered. This fact points to the similarity- 
levels. Thus the different demand curves in figure (2) express 
differences of paying dispositions with the same number of bids. 
With the higher bids, the curve moves upward. Likewise the 





Fig. 2. 



Fig. 3. 



different supply curves in figure (3) indicate the different reservation 
prices attaching to the same number of items of supply. With 
higher reservation 
prices the curve 
moves upward. 

But changes in the 
number of demands 
at the respective 
levels of price are in- 
dicated by the move- 
ment of the demand 
curve to the right 
or the left. Like- 
wise changes in the 
number of goods for 
sale at the respective 
levels of price are in- 
dicated by the move- 
ment of the supply 
curve to the right or 
left ; see figures (4) 
and (5). 




Fig. 4. 



It is worth noting also that combining the demand schedules of 
several different men may not merely move the demand curve to 



50 



THE ECONOMICS OF ENTERPRISE 



between the demand and the supply side of any particular 
exchange ; the owners of hats may be thought of as having either a 
supply of hats or a demand for money, — the owners of money 
as having either a demand for hats or a supply of money. Each 
side has things for exchange, with limits on exchange expressed in 
the other thing. 

Because of this similarity it is possible to combine the buyers and 

the right, but must greatly change its inclination. For example : 
the bidding disposition of one individual of say 5, 4, 3, 2, will be ex- 
pressed in a curve falling 
at an inclination of 45 
degrees. Combining 
four schedules of the 
same inclination gives 
an aggregate demand of 
5, 5, 5, 5, 4, 4, 4, 4, 
3, 3, 3, 3, 2, 2, 2, 2 ; the 
four curves unite into a 
wholly different curve. 
See figure (6). This 
combined curve reports 
a high degree of elas- 
ticity in purchases. The 
more different purchases 
of a given paying dis- 
position the more de- 
mands will be uncovered 
by a given fall in price, 
and the less rapidly the 
price will suffer with expanding supplies of goods. (Parallel 
reasonings apply to the supply side of the price equation.) 

Generalizing, then, the language of plotting : With stationary 
supply, the demand curve moving up or to the right must 
mean higher prices ; moving to the left or down, lower prices. 

With stationary de- 
mand, the supply curve 
moving up or to the left 
means higher prices; 
moving to the right or 
down, lower prices. 

With both curves 
moving, the possible com- 
binations and the differ- 
ent price adjustments are 
indefinitely numerous. 




Fig. 5. 




Fig. 6. 



THE ADJUSTMENT OF PRICE 



51 



sellers' money estimates of hats into one schedule which will ex- 
press for each man the relation for him between money and hats. 
That is : 



Those 


WHO 


Those who 




HA\'E Hats 


HAVE Monet 








Bi 


estimates 5 of money as equal to 1 hat 






B2 


estimates 4 of money as equal to 1 hat 


S, 






estimates 4 of money as equal to 1 hat 






B3 


estimates 3 of money as equal to 1 hat 


S2 






estimates 3 of money as equal to 1 hat 






B4 


estimates 2 of money as equal to 1 hat 


S3 






estimates 2 of money as equal to 1 hat 






Bs 


estimates 1 of money as equal to 1 hat 


S4 






estimates 1 of money as equal to 1 hat 



Those who esteem hats the most highly, and have purchasing power 
either in the form of money or of hats, will be the owners of the hats 
after the exchange. And since there are four hats in the market, 
the price must be high enough to exclude all but four of the men. 
Counting down the schedule discloses the price to be three. Bi and 
B2 and B3 each give $3 for a hat, and S2 and S3 and S4 each sell a 
hat for $3. Si may be said to have thought too much of hats or too 
little of dollars to make the exchange, and B4 and B5 may be said to 
have thought too little of hats or too much of dollars to make the 
exchange. It is also evident that Bi and B2 bought for less money 
than they were willing to pay, and that S3 and S4 sold for more 
money than the least that they would accept. These differentials 
between what one would sell for or buy for if he had to, and what 
he actually has to buy for or sell for, are called respectively bui^ers' 
and sellers' surpluses. 

It is thus evident that if we decide to regard the money side of the 
situation as demand for hats, and the hat side of the situation, not 
as demand for money, but only as supply of hats, we must recognize 
the holders of hats as themselves having demands for hats. 
Each seller plays in fact two roles. If he had not a hat, he would be 
ready to biiy one at anything below his reservation limit. Or 
selUng at above his limit he should logically buy again if the price 
falls as low as his limit. The case is, then, not one of wiUingness to 
sell at any price, but is rather like that of an auction where goods 
purport to be sold without reservation, but where, in fact, the seller's 



52 THE ECONOMICS OF ENTERPRISE 

own demands are represented by an authorized bidder-in who stands 
out in the crowd. These reservation prices ought then to rank as 
within the demand column. Transferring these reservation prices 
so as to appear as demands, our problem reduces itself to the simple 
type of 4 items of goods offered for sale at whatever they maj' bring 
as over against the original demand of 5, 4, 3, 2, 1 of buyers' maxima 
plus the 1, 2, 3, and 4 of sellers' minima — a total demand of 5, 4 4, 
3 3, 2 2, 1 1. Over against this are the four items of goods for sale 
without limitation of any sort. The price is, of course, as 
before, 3. 

Utility in relation to money demand. — The relation between the 
utility of any good and the disposition to offer a price for it will be 
fully considered in a later chapter (VII). At present, it suffices to 
note that, when anything is high in price, relatively little of it can 
be sold. It does not follow, however, that with increasing plenty 
the consumption of any particular good can be enlarged without 
limit. Apples sometimes rot upon the ground or in the cellar be- 
cause we have more than we want; that is to say, useful things 
may exist in such abundance as to have no value ; you cannot sell 
them or even give them away. Water, for example, may be worth 
nothing — not that any particular amount of water has become less 
capable of satisfying a human need, but because the supply of water 
outruns the total need. Some part of the total stock is thus ab- 
solutely without utihty. This is simply another manner of saying 
that human desires and needs arc not infinite in any particular 
direction ; and this again means simply that needs and desires be- 
come less intense with partial satisfaction. One does not ordinarily 
care as much for a second glass of water as for the first. Were this 
not true, our work could bring us no great good, eating would leave 
us always hungry, and our wealth afford us little comfort or content. 
The same principle is illustrated in our daily expenditures, and ex- 
plains how we come to make them as we do. No one applies his 
entire income to the purchase of food or shelter. Food is the 
primary necessity, but clothing is more acutely required than is a 
second dinner. We supply our wants in the order of their intensities. 
When you have purchased yourself a reasonably large wardrobe, the 
fact that you make no further purchases of this sort does not indicate 
that you have no further desire for clothing, but only that you have 
a stronger desire for something else. It is a peculiar and exasper- 
ating fact about a dollar that you can spend it only once. To buy 
one thing is to go without some other, to sacrifice an alternative pur- 
chase. You must choose. Choosing, you follow the line of the 



THE ADJUSTMENT OF PRICE 53 

smaller sacrifice. So the purchase of apples at ten cents each 
would mean to you and to me the lack of other things that we desire 
more intensely than apples. 

Margins and marginality. — Margins of one sort or another are 
present in almost all sorts of economic relations. Where the items 
of supply and of demand are many there is a marginal buyer — ' 
the man wlio is upon the point of refusing to buy if the price shall 
rise — • the man whose demand was barely uncovered by the last 
fall in price ; and there is always a marginal excluded buyer — the 
man who does not buy, but will buy if the price goes one jot lower. 
Similarly, there is the marginal seller, whose reservation price is 
barely covered by the market price ; and the excluded marginal 
seller, who nibbles at the price bait, but will not take it until some- 
thing better is offered — that man nearest to selling, who yet does 
not sell. 

So, again, we speak of the marginal item of goods offered or sold, 
or of the marginal item of goods bought, meaning commonly the 
item sold by the marginal seller or bought by the marginal buyer. 
In the illustrative problem given on page 47, with the market price 
settling at 3, there was a marginal buyer at 3, a marginal seller at 
3, and a marginal item sold at 3, or bought at 3. So, again, at any 
given price for any given product, there are lands barely worth cul- 
tivating for that product ; these are the marginal lands in that use. 
And similarly there are marginal tools and machines. So, at any 
given price for products, there are marginal employers and mar- 
ginal businesses — • cases where any fall in price or any rise in the 
cost of production will diminish or suspend the contribution of 
product. And there are marginal laborers — meaning sometimes 
the man just on the point of abandoning an employment if the wages 
fall, or, again, meaning the laborers of any grade employed by a 
marginal employer. 

And there are likewise the marginal items of land or of borrowed 
capital funds, as there are marginal borrowers and lenders of each. 

Note on the marginal analysis. — This manner of market analy- 
sis especially characteristic of the Austrian school of economic 
doctrine has, under the name of the marginal method, now estab- 
lished itself among practically all economists, — • although there 
remain different views enough of the possible purposes which this 
analj^sis may serve. It is not, however, quite true to the spirit of 
the analysis to say that it leaves no room for the process of market 
higgUng. The doctrine at its logical extreme assumes that, as the 



54 THE ECONOMICS OF ENTERPRISE 

items of demand become more numerous, the margin interval within 
which the higgling process may be operative is constantly reduced. 
A sufficiently minute gradation of both offer and demand is as- 
sumed — ■ so near an approach to infinitesimals — as to justify the 
treatment of the selling price as accurately a marginal price for 
both demand and supply. Admitting all the necessary attendant 
conditions, namely, that all the commodities are of equal iesirability, 
all the competitors in the market simultaneously, and " that the 
buyers and sellers make no mistakes about the actual state of the 
market such as would prevent them from really pursuing their 
egoistic interest " ^ — assuming, in short, a perfectly frictionless 
market — this may be admitted as an accurate account, descriptively, 
of the market process. But it is another matter to assert that the 
point of adjustment expresses marginal utilities, or measures 
them, or is measured by them. It is still another matter to assert 
that these marginal traders are, as against the opposing in-pressing 
volumes of commodity and of purchasing power, the causal facts 
determining the ultimate price adjustment. It is yet even more 
questionable to assert that, while the market price coincides with the 
price limits of both marginal traders, the price is invariably deter- 
mined by the price limit of only one — the buyer. All these ques- 
tions really resolve themselves into the one great question — What 
are the causal forces in the market adjustment? 

But, at any rate, it should now be clear that the ultimate 
forces in any problem of price present themselves in the form 
of a supply of goods which are to be equated against a volume 
of money demand, and that the price is the point of adjust- 
ment between these two opposing volumes — the point at 
which the two sides of the market equation are brought to 
an equilibrium. It follows that the market price is not an 
average of all the demand prices, or of all the supply prices, 
or of all the demand and the supply prices together ; the ad- 
justment is really at the marginal, rather than at the average, 
point. Averages have, indeed, nothing to do with the case. 
The margins, however, are the points at which, and not by 
which, the price is fixed ; all items of supply and all items of 
demand are, actually or potentially, equally causes in the 
adjustment. 

It has also been shown that the determination of price is 
to be traced not more to supply than to demand or to demand 

* Bohm-Bawerk, Positive Theory of Capital, p. 204. 



THE ADJUSTMENT OF PRICE 55 

than to supply ; that with the demand taken as fixed, price 
changes with every change in the supply, and that with the 
supply taken as fixed, price changes with every change in the 
demand; that supply means all of the goods there are for 
sale at any price, demand, all of the price-paying dispositions 
directed toward the supply ; and that the reservation prices 
of the sellers are, in ultimate analysis, demands, and are as 
important to the fixation of price, and important in precisely 
the same way, as are the price-paying dispositions of the 
seekers for goods. 

But the present chapter has taken for granted an existing 
volume of demand — inclusive of the demands of both buyers 
and sellers — and an existing volume of goods as supply, 
making scant attempt to explain the demands and making 
no attempt to explain the supply. Logically, therefore, these 
two tasks await us — an examination of the relation of needs 
and desires to demand, and of cost of production to supply. 
We shall begin with cost of production and supply. 

The next chapter will, then, show that cost of production 
bears on market price through affecting supply, and in no 
other way ; that with goods susceptible of changes in supply, 
cost of production is the key to these changes, and that only 
as the explanation of supply, and in the sense adapted to serve 
as such explanation, does cost of production concern the econ- 
omist ; that therefore it is cost in the competitive sense solely 
and in price terms only that can signify in the analysis of the 
price problem — cost to the hiring entrepreneur and not to 
the employed laborer — cost in the sense of expenditure and 
financial sacrifice rather than of pain or discomfort or wear of 
life ; that, as the limit on supply, and as compensated in the 
forthcoming of product saleable at a price, cost of produc- 
tion must include and express, in terms of a price total, all 
that the entrepreneur computes as impediment or resistance 
in his process of production ; that the cost computation must 
stand as a purely personal and individual computation ; 
that, as the cost computation is the computation of an en- 
trepreneur, it must express and report his methods, processes, 
and decisions — must declare the indemnity or compensa- 
tion necessary to obtain from him his product — and must 
therefore, include, as resistances to be overcome by the price 
of the product, (1) all expected pains, disagreeablenesses, and 
dangers in the process, at those prices at which, as resistances, 



56 THE ECONOMICS OF ENTERPRISE 

they function ; (2) all prospective expenditures ; (3) such 
displaced alternative gains as actually bear upon the case ; 
(4) the entrepreneur's opposing disposition to consume his 
resources rather than to invest them in the line of production 
under examination ; (5) all hazards or risks as he actually 
estimates them, or has to pay to be protected from them ; 
and (6) all taxes or other regular or casual burdens imposed 
upon him by the undertaking. 

It will thus appear that alternative profits are costs in any 
given undertaking — are necessary profits if the undertaking 
is to continue ; that costs are mostly due to the resisting ap- 
peal of the demands for other things ; that costs are the pre- 
cise analogue, in the production of goods, to the seller's 
refusal prices in the marketing of goods ; that ordinarily 
these costs explain these refusal prices ; and that therefore 
it is a purely fictitious issue to argue which is the more im- 
portant — demand or supply — in the fixation of price. 

And finally it will be shown that, in last analysis, all cases 
of marginality in production are personal margins and not 
margins of agents or instruments ; that there are an indefinite 
number of all three sorts ; but that instruments and agents 
are marginal only relatively to the entrepreneur who em- 
ploys them ; and that no margin of any sort is relevant to 
the determination of market price excepting as bearing in 
some way upon the limitation of the supply. 



CHAPTER VI 

SUPPLY DETERMINED BY COST OF PRODUCTION 

How price affects purchases. — It is a commonplace fact 
that if you are going to sell things at a very high price you 
will not sell many of them. When bananas are ten cents 
each, most people purchase in limited quantities. If I am 
exceedingly hungry for bananas, I may buy one at this 
price. If the supply increases and the price falls, my desires 
express themselves in larger purchases. While neither 
my need nor my price-paying disposition has expanded, new 
conditions have arisen in which banana appetites of lower 
intensity come into play, much as one may imagine to him- 
self the gradual subsidence of a lake or sea, and the appear- 
ance, one after another, of reefs and bars and islands. 

Price with fixed supply : Cost and supply. — It is not 
always, however, the case that the supply of products is a 
changeable supply. It occasionally happens that the volume 
of goods of a particular kind is entirely fixed and definite. 
There are some things, that is to say, the supply of which is 
beyond the possibility of enlargement — like 18th century 
furniture, the old masters, grandfathers' clocks, and the 
like. And some other things there are, the supply of which 
changes, but not in response to human decision or effort, — 
meteorological stones, for example. The first step in the 
analysis of market price assumes, therefore, a fixed supply. 
But cases of this sort are not common, and present little 
difficulty in analysis, and have already received sufficient 
attention. Monopolistic limitations of supply are also 
readily disposed of from the point of view of theory. It 
suffices at present to grasp the truth of Senior's statement : 
" Any other cause limiting supply is just as efficient a cause 
of value in an article as the necessity of labor in its produc- 

57 



58 THE ECONOMICS OF ENTERPRISE 

tion. And, in fact, if all the commodities used by man were 
supplied by nature without any interference whatever of 
human labor, but were supplied in precisely the same amounts 
that they now are, there is no reason to suppose either that 
they would cease to be valuable or would exchange at any 
other than the present proportions." ^ Cost of production, 
that is to say, bears upon market price and fixes market 
price in the sense solely, and in the degree, that it serves 
to determine or modify the supply side of the value equation. 
Supply affects price. Cost of production limits supply. 
Our problem, then, is to analyze the nature of cost of pro- 
duction and to show the manner of its bearing on supply. 

Specialization and Cost : The fundamental principle, — 
We have already noted that in our actual pecuniary form of 
society division of labor is possible only on terms of the 
possible exchange of products. But how does this division 
of labor establish itself? On what basis does each man 
select for himself a particular line of production? And 
how far does he carry production in this line? And why 
does he stop? Viewed in the large, cost of production is 
one aspect of the general division of labor — the doing of 
one thing on terms of foregoing the doing of another. 

In human affairs as in the inanimate world, it may be 
said that force always follows the line of least resistance. 
Water seeking an outlet breaks through the weakest point 
in the barrier. The chain gives way at its weakest link. 
When two opposing forces meet, the weaker is overbalanced. 
The line of least resistance includes also the line of the 
strongest pull. The stronger attraction prevails. So men, 
in choosing between different pains or discomforts, refuse 
the greater, submitting to the less ; in choosing between 
different attractions, they select the greater, following 
always the line of least motive resistance. That is to say, 
the line of human action is the line of least sacrifice. Accu- 
rately speaking, one cannot act contrary to his choice. Men 
always do the thing which they prefer. If the thing done 
were not the preferred thing, another thing would be done. 

1 Senior, Political Economy, 6th edition, London, p. 24. 



SUPPLY AND COST 59 

The choice may be between several evils ; in that case the 
choice 6f the least is none the less a choice. 

Least sacrifice. — We are in substance seeking a formula 
for human choices in the field of production. Here choice 
follows the psychological law valid for all human activity : 
men follow the line of least sacrifice. To say merely that 
each man seeks always the maximum of satisfaction of his 
wants is not adequate for all cases. Men commonly dislike 
work ; at all events some of them do ; and all men do at some 
nearer or more distant fatigue limit. How set off the utilities 
of product against the irksomeness of the productive process ? 
And what shall be said of the men who are submitting to the 
pains of work in order to avoid the pains of unsatisfied want ? 
Only where, between two lines of agreeable work, one chooses 
that line which in process and product affords the larger 
satisfaction of wants is the formula of the maximizing of 
pleasure adequate. But the formula of the minimizin'g of 
sacrifice is everywhere sufficiently inclusive. For the man 
who works because he finds work pleasant, it would be a 
sacrifice to refrain from work ; he chooses that line of work 
which he prefers, in view both of the pleasures of the activity 
and of the accompanying compensations in productiveness. 
He ceases to work at the point where continuance would 
be the greater sacrifice. The man to whom all effort is 
irksome chooses that line of activity which, in view both of 
the quality of the work and of its compensation, involves 
the smallest sacrifice. For him who prefers idleness to activ- 
ity, activity would mean the larger sacrifice. 

This principle of the minimizing of sacrifice is, then, the 
generalization for which we are seeking. In substance 
it is a particular application of a law general in the physical 
and in the moral world. Men follow their choices. But 
it is still to be noted that choice is an outcome of a complex 
of internal and external factors. The man is himself a part 
of the problem. There are outer inducements, temptations, 
penalties; there are inner appetites, antagonisms of con- 
science and sympathy, — hopes, loves, hates, and fears, — 
all phases of moral, mental, and physical weakness and 
strength. Out of the combination of these complex and 



60 THE ECONOMICS OF ENTERPRISE 

varying factors results a line of new direction — one of least 
resistance when all the varying factors are allowed for, 
humanly speaking, a choice. 

Purely as economists we are fortunately free from the 
necessity of investigating the origin of choices or any of the 
psychological difficulties surrounding the question. It is 
sufficient for us that these choices take place as human 
nature presents itself. Men follow the line of least motive 
resistance. 

Cost in the isolated economy. — But the manner by which 
different men work out their selection of different specialized lines 
of gainful activity, and the computations involved in this process, 
may well be different in differently organized societies. 

The isolated individual economy — that of Crusoe, for example, 
an economy not unlike in principle that of a socialistic or coUectivist 
society — furnishes its peculiar problem of production costs. Crusoe 
could not rationally produce anything unless its utility overweighed, 
or at least balanced, both the discomfort of the work applied and the 
loss of such utilities of recreation as the situation offered. And, 
within the limits of this first principle, no product could be ration- 
ally produced the production of which involved the displacement of 
a more desirable product. So far then as he planned his work ra- 
tionally, Crusoe was continually turning his efforts to that undone 
thing, the doing of which had come to be of leading importance — 
subject all the while, of course, to the condition that it was worth 
the labor penalties involved. At a certain point fishing was aban- 
doned for game : More fish were refused in the interests of more 
game. The game cost fish, or the fish cost game ; since the work 
which would produce either fish or game was applied to game and 
withdrawn from fish. The limit upon production, the cost barrier, 
was reached at the first one of two margins, — the margin of effort 
and of displaced recreation, or the margin of displaced alternative 
product. 

These displacements of possible products, these foregoings 
of alternative openings, these sacrifices of some second thing 
in the process of getting some particular thing, are perhaps 
best indicated under the term opportunity costs. To go with- 
out fish to get game or to raise wheat upon terms of foregoing 
the raising of corn may be taken as illustrative of one of the 
simplest aspects of this doctrine of opportunity cost. 



SUPPLY AND COST 61 

What resistances cost includes. — One of the difficulties 
in the case is, however, that the term cost is not quite satis- 
factory for all aspects of the doctrine : 

Suppose, for example, that a child has been given both a pear and a 
peach ; that some predatory boy tries to seize them ; and that the 
only method of saving either is to drop one, say the pear, in the 
wayside weeds, and to run for shelter with the peach while the aggres- 
sor is picking up the pear : What has the peach cost ? 

True the peach was a gift. In a certain sense, therefore, it cost 
nothing. Nevertheless it is retained only on terms of foregoing 
the pear. The term cost seems not quite satisfactorily to cover the 
case. Perhaps displacement or foregoing would be preferable. 

Or, if one offers you your choice between a ride and an evening at 
the theater, it is awkward to say that the acceptance of the one is at 
the cost of the other. Yet the resistance to the taking of the one is 
the letting go of the other. As in the preceding case, the chosen 
thing remains a gift. The term cost is here also measurably a 
misfit : the nature of the resistance is better indicated by some term 
like displacement or sacrifice or foregone opportunity. 

Or, if with a dollar which you have earned you are at choice 
between buying a book or a pocket knife, and finally buy the book, 
the resistance overcome is best expressed, not by the labor devoted 
to the earning of the dollar, and not by the dollar itself, but by the 
alternative application of the dollar. True it is, in one sense, that 
the book cost a dollar, because that was the price of it ; or you can 
reasonably say that it cost you a day's labor. But the ultimate 
significance of the labor of the dollar was in the product which it 
could be made to achieve for you. The highest cost of the book, the 
best test or measure of its worth to you, was in the significance of its 
strongest competitor, the knife. And still, in this case as in the 
others, some term like displacement or foregone opportunity or 
sacrifice appeals as the more appropriate for expressing the ultimate 
fact. 

Or, if one's work for a day will produce for him one bushel of 
wheat or two bushels of corn — these being the productive oppor- 
tunities at the top of the list — and wheat is chosen, it is possible to 
say either that the wheat cost a day's labor or that it cost two bushels 
of corn. But inasmuch as the choice was really between wheat and 
corn, rather than between wheat and rest or between wheat and 
recreation, the corn offers the leading resistance and is, therefore, 
the cost, in the sense of displaced opportunity or foregone fact or 
sacrifice. 



62 THE ECONOMICS OF ENTERPRISE 

Actually the notion of cost of production as employed in 
economic usage is made to do duty for all of these cases as 
well as to include such money outlays, or expenditures, as 
may also require to be taken into account. Cost of pro- 
duction, that is to say, points in its ultimate significance to 
the thought of opposition, conflict, hindrance, resistance. 

CoUectivist cost as displaced opportunity. — Parallel to the Crusoe 
computation of cost of production is the socialistic or coUectivist ' 
computation. An ideal adjustment of coUectivist costs would pre- 
scribe, (1) that no product impose sacrifices in the burdens of labor 
and in the foregone recreation, overbalancing the advantages to 
be derived from the product ; (2) that no product displace a prod- 
uct more desirable than itself. The cost of any product must 
be found in whichever of these two hnes the resistance were 
the greater. 

That form of sacrifice which is expressed in the term opportunity 
cost is, then, an aspect of cost of production especially important 
both in the isolated and in the coUectivist economy. And the 
doctrine extends more widely than merely to the applications of 
productive labor. It applies also for all instruments of production. 
Shall, for example, certain lands of the community be used as 
orchard lands? What then is the cost of production of the fruit 
obtained from them? This is to ask what are the counter-attrac- 
tions in the employment of the land — what does the having of the 
fruit mean in terms of going without something else. The land 
being fertile is going to be used for something. The problem of 
choice lies in the decision between two alternative products — fruit 
versus its strongest competitor. The cost of either product is, 
then, the displacement of the other — a problem of sacrifice, a 
foregoing ; this is a typical case of opportunity cost. This sort 
of cost of production is, indeed, the leading cost category for the 
isolated as for the coUectivist analysis. 

If, therefore, there be among the coUectivist estates land adapted 
solely to one line of production — mineral lands, for example, or 
salt marsh, or cranberry swamps, — there may be no alternative 
productivity of the land to be computed as resistance to the land use. 
Productivity of the land there is, possibly in a marked degree, but 
all the costs in the case are to be sought on the side of the labor or 

* Collectivism is a term broader and less definite than either 
socialism or communism, a;nd includes the two. It means some 
sort of general social partnership in economic affairs. 



SUPPLY AND COST 63 

of the machinery or of the raw materials apphed. So, when once 
any sort of machinery for any use is in existence, the cost analysis 
points not to the labor applied in producing it but to its best alterna- 
tive use. And even in the forward looking view, when the making 
of machinery is under consideration, the same analysis probably 
holds; for, presumably, the advantages from its use, even in its 
second possible employment, are great enough to outweigh the cost 
of its construction. And in turn, the original cost of construction 
may lie, in the larger part or entirely, in the displacement, not of 
goods for consumption, but of other possible equipment goods. 

And in the case of labor, also, the cost in a "coUectivist society 
— either socialistic or communistic — would ordinarily be the 
alternative product of the labor rather than in the labor burden 
itself. Especially is this likely to be true of the more skilled varie- 
ties of labor ; up to the point, at least, where the day's-end margin of 
weariness applies. And even here, the cost is commonly in large 
measure the displacement of the positive advantages of recreation, 
rather than solely in the pain significance of further effort. Thus 
opportunity cost, broadly interpreted, applies in greater or less de- 
gree to all cases where alternatives of product or of other advantage 
are open. The line of least resistance in economic productivity is 
almost inevitably, therefore, in some part or entirely, the line of the 
strongest pull. 

Thus the principle of selection in the working out of the division 
of labor in a collectivist society is the principle of the line of least 
sacrifice — the same principle, in fact, that presides over the direc- 
tion of purchasing power in the market in the individual's choice of 
what he shall buy. 

Competitive costs. — To assert that with most goods the 
supply is limited through the influence of cost of production 
is merely another way of saying that we have rarely to do 
with goods present in fixed and inelastic stocks. Likewise 
it is a way of asserting that such goods as are forthcoming 
present themselves with reservation, or refusal, prices 
attached. And if these be not attached to the products 
when once they are produced, they are attached as a condi- 
tion to the continued forthcoming of the products. Costs 
of production are, therefore, as between producers and con- 
sumers, the analogue of reservation prices as between sellers 
and buyers. And this, in turn, means that cost of produc- 
tion as bearing upon market price points really to cost of 



64 THE ECONOMICS OF ENTERPRISE 

reproduction, to that necessary price-indemnity, for any item 
or volume of products, below which that production will not 
be maintained. Our analysis of the fixation of the market 
price as subjected to the influence of cost of production both 
parallels and complements, therefore, the earlier price analy- 
sis. It was there made clear that market price is neither an 
average of price offers, nor of supply prices, nor of both to- 
gether, but is commensurate both with the marginal price 
offer and the marginal reservation price. 

^ Cost and supply : margins and cost. — Similarly where 
the market price is influenced by cost of production : the 
market price tends to be commensurate not with cost of 
production in general, or in the average, but only with the 
marginal cost of production. If the price rises, the supply 
will increase ; if the price falls, the supply will diminish. 
With rising prices new producers with higher costs of produc- 
tion will offer products, or producers already in the market 
will enlarge their output. The new point of equilibrium 
between demand and supply will be a point at which the 
producers at highest cost — or those portions of their product 
which are highest in cost — are barely indemnified in the 
selling price. Thus marginal cost of production and market 
price tend to be identical. But this is not to say that the 
marginal cost of production fixes or determines the price, 
but only that it tends to be identical with the price. Equally 
it tends to be identical with the marginal price offer. It 
is not the result of either to the exclusion of the other, or 
of both to the exclusion of other items of demand and supply, 
but rather the result of the entire supply over against the 
entire demand. The margins are points at which, and not 
hy which, the price is determined. For most purposes, in- 
deed, the marginal traders are more nearly results than causes. 
It is true that their added weight may have moved the price 
from one margin to another, but the basis upon which they 
build and to which they add is made up of countless other 
demands in face of countless other offers. 

What the marginal analysis is good for. — And note once again 
that this is in no sense to deny the important service of the marginal 



SUPPLY AND COST 65 

method. Only by the precise analysis of what is characteristic in 
marginal relations does the ready and sensitive response of price to 
the influence either of demand or of supply become intelligible ; for 
only so does a rational and detailed account of the ultimate relations 
of demand and supply become possible. 

And here, also, it is to be admitted that our demand schedules and 
our supply schedules, as an account of the process of market ad- 
justment, necessarily somewhat oversimplify the concrete phenom- 
ena. We assume for the schematic purpose that all the items of 
supply are of precisely the same quality. We assume a degree 
of care and accuracy and knowledge on the part of the traders 
which is not alwaj^s present even in the wholesale markets. And we 
assume, as in the earlier price analysis, a one-price market re- 
sultant ; we assume, that is, a perfect market. 

Marginal cost, opportunity, and profit. — How then does 
the producer for the market compute the costs? And of 
what elements are his costs made up ? And what facts ren- 
der a producer marginal ? Or render any part of his product 
a marginal product ? 

The main factors in the computatiori of costs, and the 
terminology appropriate to the cost analysis, maybe presented 
in some simple illustrative problems : 

Why not study Hebrew? Evidently not that it would 
be entirely useless, but that something else would be better 
worthwhile. What do you intend to do for a living ? Why 
not something else ? Nothing else offers equal inducements, 
all things considered : what is displaced by the chosen occu- 
pation is less than its product. And why do you not raise 
rye exclusively instead of so much wheat? The rye would 
displace a greater value in wheat than it would render in 
rye. Why not raise silk in the United States or bananas in 
Canada? True, either thing could be done were there 
nothing else to do, but other things pay better. The 
cost computation especially concerns itself with these other 
things. 

Again : a farmer owns a farm worth $1000, machinery 
and stock. worth $1000, hires a man at $300 for the season, 
himself works, and gets $1000 for his crop. What is his 
cost? What his profit? Allow, say, $200 for rent on land 



66 THE ECONOMICS OF ENTERPRISE ' 

machinery and stock (or for interest upon $2000 of capital, 
together with the deterioration and upkeep) ; add $300 
for wage outlays. The farmer's remuneration for his own 
productive effort is the remaining $500 — ■ his profit. But 
the data are insufficient for determining the cost. We do 
not know for how much the farmer's own labor should count 
as cost in the problem. 

A carpenter takes the contract for the carpenter work on a 
building for $1400, works six months himself, and pays his 
men $800. It costs him $300 to live during the six months. 
He might have worked by the day, receiving $400 in wages. 
What is his cost? What his profit? The living expenses 
are irrelevant either to cost or to profit. Some men live 
out of their profits as others out of wages or rents or interest 
— unless, indeed, the living expenses outrun the income. 
It is in this last case true merely that the wages, or the profits, 
fail to cover the living expenses. Profits are none the less 
profits because they are spent or overspent. You would 
not say that you got no berries because you ate them, or 
no wages because you spent them. Wages and profits are 
merely different ways in which human gainful activity gets 
rewarded. But wages imply an employer to pay them. 
Profits are the reward of the self-employed worker. Paying 
out $800 of wages leaves the contractor $600 for his own 
labor, supervisory or other. $600 then is his profit. But 
what was his cost? It was $800 of outlay plus $400 of dis- 
placed earnings. His profits, that is to say, are $200 more 
than his necessary profits. Profits are not the excess above 
cost ; they divide into necessary profit — that which is part 
of cost — and unnecessary profit — that which is a differ- 
ential above cost. Had the contract price for the work been 
$1100 instead of $1400, the profit would have been $300, 
falling $100 below the cost requirement, — $100 short of the 
minimum profit. It is thus possible to have absolute profit 
and relative loss — possible, that is to say, to have a profit 
less than the necessary profit. Cost of production takes 
account of this relative aspect of the enterprise. It is the 
necessary indemnity. And now we are ready for the niceties 
of the complete and accurate analysis. 



SUPPLY AND COST 67 

The various factors in cost. — Each producer, estimating 
as best he may the prices which various products will bring, 
has before him the problem of selecting a particular line of 
production, or the problem whether or not to remain in his 
existing line, and the further problem, also, of how to produce 
most cheaply the product which he elects. Suppose, for 
example, that he undertakes the production of wheat. He 
will need seed, fertilizers, labor, and different sorts of pro- 
duction goods — land, machines, tools. He will have taxes 
to pay, and insurance — excepting so far as he may carry 
his own risks, — and various minor outlays. He may have 
to borrow from the bank or from the money lender ; in any 
case he will have to reckon a rate of compensation upon 
the various portions of his investment for such periods as 
his enterprise shuts him out of an alternative investment. 
He may, also, have to include some indemnity for risks that 
his insurance policies do not cover. And finally, he must 
compute as a further cost that compensation for his own time 
and effort below which he cannot afford to remain in this 
line of production. 

And now for a few definitions — together with the repetition of 
some of the old : 

The entrepreneur is the independent, unemployed manager ; the 
one who carries the risks and claims the gains of the enterprise. 

Compensation for hired labor is wages (or salary). Compensa- 
tion for the entrepreneur is profit. The hire for borrowed funds is 
interest in one of its manifestations. The hires for lands and tools 
and machinery are rents. Rents, interest, wages, and such neces- 
sary profit as serves merely to indemnify the entrepreneur for 
entering or continuing the enterprise, are commonly regarded as the 
main and typical components of the total cost of production to the 
entrepreneur. 

Obviously, however, the rents on his own equipment must be 
computed as cost ; since he could have lent them out for hire, or, 
selling them, have lent out the price. Thus we include in cost a 
rental charge (together with upkeep charges) upon the equipment 
goods of the entrepreneur. Or this same amount may be arrived 
at through computing an interest charge, a percentage upon the 
total amount of equipment reduced to a money denominator and 
regarded as a sum of capital. And another interest charge must 



68 THE ECONOMICS OF ENTERPRISE 

also be computed — a something which has not its alternative state- 
ment in terms of rent : whatever outlays the entrepreneur has made 
have had each its date, early or late, with reference to the time of 
marketing the product : the interest cost is, therefore, to be com- 
puted on these. Likewise the rentals which, by virtue of his under- 
taking, he has foregone, have to receive each its hypothetical date 
of maturity and its separate allowance for interest from that date 
to the date of marketing the product. 

A typical cost account. — Thus the cost account against a 
$3000 normal crop of wheat marketed on Jan. 1, 1911, from 
a tract of land of 200 acres would look something as follows : 

(1) Rent on 200 acres of land at $3 per acre (or inter- 

est upon a $10,000 investment in land at 6 % 
annually) i $600 

(2) Interest on $600 from Oct. 1, 1910, to Jan. 1, 

1911 (it being assumed that the rent would 
have been due at this date if the land had been 
rented) 9 

(3) Rent on machinery and stock (or interest on $2000, 

total value of same, from April 1, 1910), 8 mos. 80 

(4) Wages for month of April paid to men May 1st 100 

(5) Interest on same, 8 months 4 

(6) Seed and fertilizer as of May 1st 500 

(7) Interest on same, 7 months 17.50 

(8) June, July, and Aug., etc. wages 300 

(9) Interest on same, total 7.50 

(10) Hail insurance for three months, paid May 1st 50 

(11) Interest on same, 8 months 2 

(12) Taxes on land, paid Nov. 1st 100 

(13) Interest on same, two months 1 

(14) Repairs and depreciation on machinery and horses 

asof Jan. 1, 1911 112.25 

(15) Depreciation of land as of Jan. 1, 1911 100 

Amount carried forward $1983.25 

1 There is inaccuracy involved with item (1) and with the similar 
items, to the extent that the displaced use may be — and generally 
is — somewhat greater than the rent paid out or the rent foregone. 
But these inevitable inaccuracies are eared for under item 23 below 
■ — the displaced personal earnings. The computation of aggregate 
costs does not involve a precise allocation of the separate and 
specific productivities. Nor indeed, as we shall later see, is such 
accuracy possible. 



SUPPLY AND COST 69 

Amount carried forward $1983.25 

(16) Outlay for hired teams, averaged, as of June 1st 100 

(17) Interest on same for 7 months 3.50 

(18) Rents on hired machinery, etc., paid Sept. 1st 100 

(19) Interest on same, 4 months 1.50 

(20) Threshing bill, Sept. 15 100 

(21) Interest on same, 3| months 1.75 

(22) Risk by drought, etc., — ■ other than hail 200 

(23) Value of entrepreneur's own time and supervision 

as of Jan. 1, 1911 (based upon alternative per- 
sonal earnings purely, perhaps as wage earner, 
or in no matter what best alternative) 700 

Total $3190.00 

Add also, say, ten dollars for general interest on a vary- 
ing margin of funds, necessarily kept on hand in the con- 
duct of the business, and not accounted for in the separate 
and specific interest charges above. 

That is to say, the crop which this farmer has marketed at $3000 
— and upon which he has actually paid out 

1500 of wages during the summer 
50 of insurance in May 
100 for taxes, Nov. 1st 
100 for rented appliances in Aug. 
100 for threshing in Sept., 

a total of $850 — has really cost him $3190.00, — $190.00 more 
than he has sold it for. Looking back upon the question in the 
light of his present knowledge, he would better have done something 
else. Looking forward — if this experience seems to point to a 
similar experience with wheat in the future, and to point also to 
similarly attractive alternative openings, — he will decide that he 
would better either abandon or modify the production of wheat. 
Perhaps his costs on only some part of his total output were too 
high ; perhaps his costs per bushel were too large because his busi- 
ness was too small. But assuming that his methods were the best 
methods open to him in wheat production, he will more or less radi- 
cally restrict his output. 

The cost computation concerns only the future supply. — 
Note now that even when the computation of cost of pro- 
duction appears to be a backward-looking computation, it 



70 THE ECONOMICS OF ENTERPRISE 

is only as a basis for a further and forward looking computa- 
tion. (^ Costs that have been, have no direct bearing upon 
present price. The supply is as it is, no matter what the 
costs are now seen to have been. The cost of production 
that is really and ultimately significant in modifying price 
is the prospective cost as over against the prospective price. 
And in most occupations the computation is for a fairly 
long term — a season, or a succession of years, or even a 
lifetime. The bearing of cost, such as it is — and however 
tardy is its working on the volume of supply, — is signifi- 
cant only for such persons as undertake the cost, and for 
the supply which it affects, and for the period upon which 
it bears. Prices are influenced by it by virtue of the fact 
that there are always enough marginal men in any competi- 
tive production to bring about a reduction of the supply, 
if the relative advantages of the industry appear likely to 
suffer. And there are always men in other industries, near 
to their respective margins, who will be attracted to any 
particular industry if its relative advantages appreciably 
increase. 

Cost sums up all resistances under the price denominator. — 

There is danger, however, that in some cases this principle of oppor- 
tunity costs may be overemphasized. A cost computation that is 
adequate and exhaustive must reduce to the price denominator all 
of the different resistances which bear on the case. If the line of 
production or the particular item of product under consideration 
involves an especial degree of hardship, or danger, or ill repute, the 
necessary indemnity is often ai^preciably the greater. Pain costs 
and disrepute costs and danger costs may require to be reduced to 
the common denominator of price, as making part of the total cost 
expressed in price as a sum of the price resistances. The saloon busi- 
ness, for example, and the business of safe-cracking, probably bring 
returns out of proportion to the skill and effort invested in them. So 
some fields of teaching, by their freedom from stress and care and 
by the interesting quality of the work, may offer remunerations 
considerably short of proportional to the expenses of preparation and 
to the ability which they require. These relative advantages, or 
disadvantages, inasmuch and in so far as they bear upon costs, 
affect prices in the same way that all other costs affect prices, namely, 
through influencing the volume of supply. 



SUPPLY AND COST 71 

Which is fundamental to price — cost or demand? — We 

are now in a position to resolve a famous and long-standing 
controversy in economic theory: Is price more dependent 
upon utility than upon cost — upon demand forces than 
upon supply forces — upon marginal utility than upon mar- 
ginal cost ; or is it equally dependent upon both ? It may be 
truly said that the dependence is equally upon both, that 
price is the equating point between the two sides of the 
price equation ; but it is still open to urge upon the demand 
side of the argument that, after all, there could be no motive 
for production if there were no wants to be satisfied, and 
that there could be no justification for cost if there were 
no demand for the product. Surely it must be admitted 
that human wants are the dynamic facts behind all economic 
activity. In the main, then, the primacy is with the de- 
mand side, although this is not to deny the importance — ■ 
the secondary importance — of supply ; for if there were 
no limit upon production, no price could attach to the prod- 
uct. The market price, in this view of it, appears to offer 
a precise analogy to the point of adjustment reached when 
a coiled spring is pushed : action and reaction are equal, 
but the resistance is merely another aspect of the original 
pressure, a reflex from it. The push is still the primary 
fact. Where the point of new adjustment is found depends 
upon the strength of the push. 

But the advocate of the supply side of the argument 
emphasizes cost^ of production, and asks whether the point 
is not equally a matter of the strength of the spring. With- 
out questioning the fact that the original force in economic 
production and in market adjustments is this fact of human 
desire, one may still deny that, in the actual determination 
of price, demand is of more importance than supply. True 
it is that useful things external to man are objects of his 
desire; they furnish service, afford satisfaction, or protect 
from discomfort. If sacrifice is a condition to their enjoy- 
ment, they command sacrifice. But it still stands as true _,- 
that things have not prices proportionate to their utilities. | 
Price comes about only when there is resistance to be over-* 
come; when there is a disparity between desires and the 



72 THE ECONOMICS OF ENTERPRISE 

means to their satisfaction. Is not value, then, or price, 
more nearly a measure of the scarcity of things than of their 
usefulness? Value, or price, appears to emerge in human 
life only when obstacles and difficulties are found in the 
path of enjoyment; when satisfactions are saddled with 
burdens ; when needs impose something to be avoided. We 
are richer in our rainfalls than in our irrigation ditches ; and 
we should be still better off were these rainfalls not so scant. 
Value arises when things cost. Human interests are for- 
warded by plenty rather-than by scarcity — are antagonistic 
to value rather than in harmony with it. Economic prog- 
ress, therefore, must express itself in successive reductions 
of the sacrifices necessary to the satisfaction of desire, in 
the approach of commodities to the margin where value and 
price disappear — in short, in the cheapening of things. A 
short crop commonly sells for more than an a^bundant crop. 
The destruction of the shipload of spices was a creation of 
value — not of spices. That water or air should become 
so valuable as to command a price would mean that society 
had essentially lost rather than gained in weal. Value, 
therefore, appears to connote sacrifice rather than well-being. 

Opposing demands are bases of costs. — But no matter 
which side of this controversy shall seem to present the more 
appealing case, the whole issue must be declared to be merely 
apparent and ultimately meaningless. Recalling the fact 
that in the analysis of demand and supply the marginal 
price-demand was a case of indifference between two com- 
peting marginal utilities, and that the reservation price of 
the seller was itself an expression of demand — the point 
at which, with a falling price, the thing in hand was equal 
in desirability to something else obtainable through that 
price — the case begins to look like an inquiry whether the 
demands of buyers are more important to price than are 
the demands of sellers. 

But with the introduction of cost-of-production influences, 
and with cost of production correctly interpreted, the last 
necessary step in the argument is taken. So far as it is not 
direct outlay, the cost or refusal price is, in the main, the 
resisting appeal of competing opportunities. The direct 



SUPPLY AND COST 73 

outlays, also, commonly have alternative openings for gain. 
Resolving this refusal price into the compensations offered 
by other employments, or into the advantages of alternative 
activities, price isjrecognized as the equating point between 
opposing demands. The cost computation of the entre- 
preneur is merely his way of arriving at a decision as to what 
commodity he shall best produce. It is a choice as to which 
demand offers the largest inducement. Marginality in 
production means that an equality of advantages exists 
between the two most attractive alternatives. 

Thus viewed, the supply of goods of any one kind appears 
as a flow of items with definite, though changing, reservation 
limits attached to their forthcoming. These limits are in 
the main given by the price demand for other products; 
that is to say, the various costs of the entrepreneur are 
mostly to ^e explained as the wages imposed by other lines 
of production — the rents obtainable in other fields of enter- 
prise, the interest charge which capital commands because 
of the other enterprises in which it can invest. All along 
the line, cost for one thing traces back to demand for other 
things ; and even for instruments of production that have 
only one line of application, the cost to any one entrepreneur 
is explained by the competing demands of other entrepre- 
neurs. There is, therefore, no issue between demand and j 
cost, simply because cost mostly resolves itself into compet- 
ing and resisting demands. It was indeed partly for the 
purpose of this particular problem that some pages back i 
the reservation prices of the sellers were shown to be them- 
selves demands. 

We now see that commonly and mainly the refusal prices / 
of products, the costs, are likewise demand facts. But 
they are none the less costs. The difficulty with the older 
view of cost of production was in its attempt to reduce all 
costs to labor or to effort, — to assume, for example, that 
value has its basis solely in one sort of sacrifice, labor — and 
that the displacement of alternative products has no signifi- 
cance as cost. Thus, for example, it was believed that the 
rent of land, land not tracing its existence to labor, could 
have no place in cost. But more of this later. 



74 THE ECONOMICS OF ENTERPRISE 

Economic influences focus in cost. — We are now pre- 
pared to grasp the truth that cost of production, so far from 
being a phenomenon simple, ultimate, and free from diffi- 
culty, is rather to be regarded as the point at which a be- 
wildering complexity of influences are summed up in one 
resultant ; it is the effect and expression of many contribu- 
tory causes. To the entrepreneur, the method of computa- 
tion is, indeed, simple enough, even though the weight to 
be given to each of the different elements in the problem 
may be far from exact. Doubtless many of the data upon 
which he must act are rather estimates than precise facts. 
For example, many of his costs are, at the inception of his 
undertaking, not determinate. The various markets in 
which he must hire or buy are fluctuating in their prices. 
And the price at which he will finally market his product is 
uncertain. He has to guess as best he can. Rain and 
drought and moth and rust and countless other contingencies 
— changed rates of interest, strikes, blockades, financial 
disturbances — are all possibilities. His alternative lines 
of activity, also, are subject to like uncertainties. He esti- 
mates and surmises and hazards where he^ cannot know, and 
as a sort of general summary, setting many things over 
against many others, he decides upon his line of largest 
net advantage, making often not better than a rough guess, 
but, none the less, a decision. 

But nevertheless for him the case is relatively simple. 
He takes wages as he finds them, rents as the market presents 
them, interest rates as he must pay them, and so on, and gets 
what gain he can. It is no part of his problem to investigate 
the causes of the prices attaching to the different items of 
his cost outlay or attaching to his alternative lines of pro- 
duction. These are as they are ; and as it does not lie with 
him to change them, but only to adjust himself to them, 
he would merely waste his energies as entrepreneur — 
becoming mere scientist — were he to set himself curiously 
to searching out the underlying explanations for what he 
finds to be unalterable. His view of the facts is adequate 
only for the particular problem that he has to face. Cost 
of production, as he sees it, explains the fact that he pro- 



SUPPLY AND COST 75 

duces a certain line of commodities, and the degree of his 
production, only on terms of taking for granted all the other 
facts and influences as the data for his particular problem. 

Cost in economic analysis. — The economist, on the other 
hand, must recognize that marginal cost of production is 
important to the price problem only as the meeting and the 
adjusting point of a wide and constantly changing variety 
of influences. There are changes in the desires and needs 
for the particular commodity, for example, wheat ; changes 
in the desires for the other products competing to attract 
the purchasing power of all the different purchasers ; changes 
in the technique of production of all the different competing 
products ; changes in the sources of supply of all the different 
raw materials — fuel getting cheaper or dearer, mines ap- 
proaching exhaustion, new deposits discovered, new supplies 
made accessible by new lines of transportation, and made 
dearer or cheaper through dearer or cheaper transportation 
— a great moving equilibrium of diverse change. Margi- 
nal cost of production is for each particular class of goods 
the summing up and the manifestation, as a price total, of 
all these different influences focusing upon the particular 
good in question. The flexibility of cost — its sensitive 
response to each and all of the changes in the conditions or 
in the forces involved in the situation — makes cost as the 
focusing point of all of these, the strategic point from which 
all of these are most effectively studied. But it does not 
explain, excepting in the sense that, as looked at from the 
point of view of the entrepreneur, it explains the degree 
and the direction of his activity. 

It is possible that the fundamental principle of cost of production 
may receive some illumination through a slight change in point of 
view: 

How much an individual, or any society as an aggregate, will pro- 
duce of any one good, out of the aggregate of goods produced, de- 
pends, in some part, upon the intensity and the extent of the desire 
for other things. Land or labor or machines may be so much the 
less plenty for some products as they are the more needed for other 
products. The relative difficulty of producing things is funda- 
mentally conditioned upon the relative equipment of human pro- 



76 THE ECONOMICS OF ENTERPRISE 

ductive power, the amount and the kind of labor efficiency together 
with the amount and the kind of external equipment. To say that 
the value of a commodity is high because the cost of producing it is 
high, still leaves it to be explained why this cost is high. In a 
competitive-entrepreneur society hke our own, where products 
have market prices, and where the various agents and instruments 
of production have their various respective rewards in wages, or 
rents, or the like, it is the comparative scarcity of these productive 
efficiencies — all the while, of course, relatively to the disposition to 
pay for the products — • that ultimately explains how all these 
different productive factors function as bases of cost of production 
in the competitive productive process. That is to say, — as will 
later more fully appear, — cost of production, as an explanation of 
price, amounts to nothing better than an explanation of the price 
of the product by the prices of the things that go to produce it. 
These underlying and contributing items of price call, also, each 
severally, for its explanation. The various items in the total cost 
of production are the price form and guise in which these ultimate 
facts of human need and of human activity and of environmental 
equipment present and manifest themselves to the producer of 
goods for the market. 

It may, indeed, be rightly argued that the present comparative 
scarcity of these productive efficiencies is the result of preceding 
market adjustments — that these productive efficiencies are them- 
selves, many of them, merely earher produced goods, and that 
since each single piece of equipment, or each item of labor, already 
stands in a price relation to every other piece of equipment or item 
of labor, it is therefore no adequate explanation of cost to appeal 
to the existing supply of equipment and of labor as ultimate. 
And it must be granted that it is not an ultimate explanation 
excepting for the purposes for which the value theorist uses it. 
The objection as urged points to the limitations of value, or price, 
theory rather than to the inadequacy of the present analysis for 
the purposes of the price and value problem. In the study of the 
market process, the economist is interested in those forces at work 
tending to estabhsh an equihbrium of price under given conditions. 
These conditions are made up of certain situation facts which the 
value theorist treats as fundamental. This situation, within which 
the present market forces are at work and of which the market is 
itself a part, might be accounted for in terms of how it developed. 
But such a task, while perhaps not impossible, and while clearly of 
much significance to the economist, is not the work of the value 



SUPPLY AND COST 77 

theorist. And until the task is accompHshed, he must content 
himself with assuming the conditions as they opaquely are, and 
with treating as fundamental the situation as it presents itself. 

Who and what are marginal ? — Recalling that our pres- 
ent problem is the explanation of the volume of the supply of 
any commodity, that the supply of many sorts of goods 
cannot be increased, and that cost of production interests 
us solely in the sense and to the degree that it explains the 
volume of supply, we return to the analysis of the influences 
which set a limit to the amount of goods produced by each 
entrepreneur. It is in this aspect that marginality in pro- 
duction becomes important. 

We have already noted that when the price of any com- 
modity rises, more of it tends to be produced — if, of course, 
further production is possible. No rise, however, is ever 
great enough to divert all industry into any particular field. 
Nor will any moderate fall in the price of any commodity 
drive out all of the producers into other industries. Some 
of the producers will go, it is true, but others will stay. 
Ordinarily, however, those that stay will somewhat reduce 
their output. Some undertakings, that is to say, are marginal 
as wholes — are making only enough to keep them going ; 
while others are variously distant from the margin of aban- 
donment. All, however, must be recognized as marginal 
as to some portion of their product. 

It is implied in the foregoing that, at any given price of 
product, some of the men and the lands and the machines 
employed in any enterprise are barely paying enough to 
justify their employment, and that, with every employed 
agent or instrument, there must be a point where further 
product will not justify the further cost involved in obtain- 
ing it. This is merely another way of saying that in many 
enterprises there are marginal factors in production, and that 
every factor must be marginal at some point for some frac- 
tion of the product possible from it. 

Several questions, therefore, present themselves for exami- 
nation. What influences render an enterprise or an entre- 
preneur marginal? When and why do some portions of 



78 THE ECONOMICS OF ENTERPRISE 

the product of the non-marginal enterprise become mar- 
ginal? Why and when do the various employed factors 
reach each its marginal limit of use? Is marginality ulti- 
mately an instrument margin or a personal margin? And, 
finally, what is the relation of marginality to price ? in what 
sense, that is, if at all, does the marginal producer, or the 
marginal factor in production, or the marginal item produced, 
have an especial bearing upon the market price of the 
product ? 

A whole business may be marginal ; that is to say, falling 
prices for the product, or rising prices for an alternative 
product, or any other influences affecting the relative de- 
sirability of different lines of production may decide the 
marginal entrepreneur to abandon entirely his existing line. 

Suppose, for illustration, that at a selling price of $2 per hat an 
entrepreneur is making a profit of 25 cents per hat ; that for every 
hat now produced he might for the same outlay and trouble produce 
a pair of shoes salable at $1.90 — thus reaping 15 cents of profit 
per pair of shoes. The cost of hats for him is then |1.90 each. 
When hats fall to this price of $1.90, he will be a marginal producer.^ 
Fifteen cents of his profits in hats out of his total 25 cents of profit 
is therefore necessary profit. In other words, 15 cents of his profit 
enters into cost of production, and 10 cents of it is a surplus above 
cost of production — unnecessary profit. 

Had this alternative in shoes been not $1.90 but $2, he would have 
been marginal in the beginning, although it might at the same time 
be true that his profit in hats were outrunning that of any competing 
manufacturer. Marginality in production is therefore not a matter 
of absolute gain, but only of gain relative to the next best alternative. 
It is not always true, or probably even commonly true, that it is the 
producer at lowest profit who is the marginal producer. Marginal- 
ity is a question of nearness to equality with the next best thing. 
The absolute amount of gain is irrelevant. Marginal profit, then, is 
really relative marginal profit. That business is nearest to the 
margin that is nearest to abandonment. 

But it is more often the case that only some portions of the prod- 
uct of the entrepreneur's business are marginal rather than that his 
entire product as an aggregate is a marginal product. FaUing prices, 
that is to say, are more likely to reduce the output than entirely to 
cancel it. This holds good equally in manufacturing and in agri- 
culture, although the illustrations in agriculture may be the more 



SUPPLY AND COST 79 

readily understood. If prices fall in agriculture, the less productive 
lands tend to be abandoned. These are the lands upon the so- 
called extensive margin — the poorest or the most distant lands. 
Such lands are practically rentless by virtue of the fact that for 
most men they are barely worth cultivating, or not worth cultivat- 
ing at all, at the ruling prices of products ; thus no cultivator can 
both afford and have to pay an appreciable rent. Similarly there 
is for every cultivator an intensive marginal cultivation on every 
piece of land that he cultivates, no matter how good. At any level 
of prices for products, each piece of land is cultivated so far as it 
seems to pay. Cultivation comes to a stop at the point where the 
increased cost is barely remunerated in the price of the increased 
product. So falhng prices mean the restriction of product on all 
land under cultivation, 'no matter of what grade; upon lands 
above the margin, however, they mean not a complete abandonment, 
but rather what amounts, in substance, to a partial abandonment. 
Some of the product is not marginal ; the marginality is not of the 
business as a whole. 

But certain conditions may affect the entire business to make it 
marginal. In agriculture, as in all gainful employments, the choice 
between businesses is not always and necessarily a choice having 
to do solely with the relative size of the alternative gains. The 
relative painfulness or dangerousness or ill repute or ill smell of the 
occupation may have to be taken into account, in arriving at the 
price total which must be had to attract the entrepreneur into the 
business, or to hold him there, once he is in. So also in every business 
the endurance limit, or the recreation limit, or the sleep limit may 
furnish a margin for some items of product. These influences, 
which are non-pecuniary and which yet demand pecuniary indem- 
nity, are, indeed, more often significant as affecting certain items of 
product rather than as affecting the relative advantages of different 
industries and the terms of the choice between them. 

But the labor-pain margin and the sundown margin of weariness 
or of recreation can obviously have no significance in deciding what 
uses to make of instruments of production, whether land or machin- 
ery. Here the margins are opportunity or outlay margins exclu- 
sively. 

Pain cost as marginal cost. — ■ It must, then, appear not a little 
strange that, among all the influences that tend to bring any pro- 
ducer to his marginal product, and thus to limit the supply abso- 
lutely or relatively to other products, most of the economists should 
have recognized as ultimate and determinant only one, the pain- 



80 THE ECONOMICS OF ENTERPRISE 

fulness of labor. For it is clear that, even at the day's-end margin, 
cessation from work is not likely to be solely a question of weariness 
as against further product. If there is no question of the hired men, 
their wages and their acquiescence, there are in any event to be con- 
sidered the comfort and the welfare of the work animals. Nowhere, 
in fact, even at sundown, does the labor-pain doctrine hold as the 
sole influence in hmiting the supply of products relatively to one 
another, or as limiting the supply of any one product, or as the sole 
explanation of the wage outlays to be incurred in any particular 
direction. Labor pain stands merely as one among the many cost 
resistances to be overcome by the prospective selling price. Our 
wheat-producing farmer, as we shall later more fully see, presents 
at the same time many different supply margins ; e.g. a rent-outlay 
margin, a wage-outlay margin, an indefinite number of seed, fer- 
tilizer, and implement margins, a corn-displacement margin for 
some portions of his product, a bean-displacement margin for other 
portions, machine-wear and land-wear margins for some acres of 
his crop, and, among all the others, pity margins for his draft cattle, 
his wife, and his children, a mixed decency-and-expediency margin 
for his employees, and, finally, a weariness margin for himself. 
And all these margins may be effective at the same time to set a 
limit, in different places and directions, to his production, and might 
conceivably converge in influence to dictate the non-production of 
any particular line of product, or of any particular item of that 
particular line. And at different price levels for products, and with 
different producers, new and different combinations of margins 
would be presented ; different supply volumes have different supply 
prices. 

Here are surely margins enough, but there are more : At the in- 
tensive margin the thing to be decided is not commonly whether 
one shall apply more expense, rather than save or spend his funds, 
but whether one may not make greater gains elsewhere. And 
there is the further problem whether or not to use more land and 
less machinery, or vice versa, or more or less labor as against either or 
both of the other classes of factors. Evidently the margins are 
legion ; and aU that we can say from the cost point of view is that 
any of the factors of production may, through a change in the resist- 
ance attaching to it, become a margin-causing factor, — become, 
that is to say, an influence deciding the producer to modify or to 
abandon his line of gainful activity. 

Marginality is personal. — But, despite all this elabora- 
tion of the fact that marginality sometimes applies to the 



SUPPLY AND COST 81 

business as a whole, sometimes only to certain items of equip- 
ment, and sometimes only to certain items of the output, 
it must not be inferred that marginality is ultimately a 
marginality of things rather than of persons. Marginality 
is a matter of individual choice. Whether it be all of the 
output or only a part of it that is upon the margin, it is in 
any case an output sought by the entrepreneur for ends 
and purposes of his own; and neither equipment nor out- 
put can be marginal otherwise than through his computa- 
tions and in relation to his situation, his activities, and his 
decisions. And precisely so again of his instruments of 
production : With falling prices any entrepreneur may 
transfer part or all of his lands to other products, or may sell 
off part or all of his capital goods, or reduce his labor in- 
vestment, or restrict his borrowing of funds ; or he may, 
leaving part or all of his investment undisturbed, transfer 
part or all of his personal activity to his next most attractive 
alternative ; or he may completely abandon the old line 
of activity. In this case of abandonment, also, he and his 
capital may hold together as one business group or complex, 
or may scatter into various enterprises ; with falling profits, 
and possibly with failing pleasure or interest in the business, 
or at the approach of old age or of ill health, he may decide 
to retire from entrepreneur activity, reducing his possessions 
to the form of loan-fund capital. But whatever may be 
the modifications which result, they will come about through 
him as a man who has become marginal in some or all of his 
activities, and no instrument will be marginal excepting in 
its relation to him. There is, in fact, no such thing as a 
marginal instrument excepting in the sense that it is marginal 
relatively to an entrepreneur. Ultimately, that is, the mar- 
ginality is one of persons, not of instruments. 

Marginality, supply, and price. — And note again that 
marginality, in no matter what aspect, is important only 
as it affects the quantity of supply and, through supply, 
affects the price of the product. The marginal item in the 
product of any entrepreneur is that item which sells for 
barely enough to cover the extra cost which it imposes. 
Any instrument is marginal when the further product ob- 



82 THE ECONOMICS OF ENTERPRISE 

tained with it or upon it sells for only enough to cover the 
costs of the other factors of production that go with it. 
Any grade of land, for example, is at the extensive margin 
when the cultivator finds that the product sells for barely 
enough to make the production worth while. The culti- 
vation of any piece of land is at the intensive margin when 
the cultivator finds that further product sells for barely 
enough to make further production worth while. The 
marginal land or instrument, or the marginal use, earns 
no rent, precisely because there is nothing to pay rent with. 
Better lands or better instruments, or better grades of 
either, command rent because they are worth paying rent 
for. Production stops at any margin precisely because, 
at the selling price of the product, production cannot wisely 
be carried further. But, obviously, this is not to say 
that the marginal land, or the marginal product, or the cost 
of production of the marginal product, determines the price. 
All of the supply over against all of the demand determines 
the price. Marginal instruments, marginal products, and 
marginal producers can affect the price only as they affect 
the supply of products. Thus no one of all the different 
margins of the entrepreneur, and no total of all the different 
margins of all the different entrepreneurs, will be price-de- 
termining or even price-influencing, excepting to the degree 
that supply undergoes modification and to the extent that 
supply is an influence in the fixation of price. 

The truth in pain cost. — And it is evident, also, not only 
that all outlays are elements of cost, but also that personal 
preferences, repugnancies, considerations of climate, neigh- 
borhood, home ties, national prejudice, wholesomeness, 
cleanliness, good repute, are all elements in cost to the 
extent that they impose expense to overcome them — to 
the extent, that is, that they restrict supply and so increase 
the price of the remaining supply. The cost problem with 
reference to each entrepreneur, and thereby to any instru- 
ment or agent under his control, is simply and solely to de- 
termine the point at which supply in different quantities 
can be had from him, and the degree and the extent of his 
elasticity in output with changes in price. And it is as one 



SUPPLY AND COST 83 

among all the other cost influences, but commonly as the 
influence of paramount importance, that opportunity cost 
acquires significance in the price problem. In any case, 
therefore, cost is purely a computation of the individual 
competing entrepreneur. Each entrepreneur has his par- 
ticular cost computation for his different items of product 
and for different quantities of product. The cost, then, of 
any item or volume of product is simply the money expres- 
sion of the total of resistance to which any entrepreneur is 
subjected in producing that item or that volume. 



It has now been shown that, the demand for any good being 
taken for granted, cost of production fixes the limit upon the 
supply of that good — if it be a reproducible good — and 
determines the price of the good, solely through modifying 
the volume of the supply ; that the cost of production of any 
item or volume of goods to any producer is the aggregate in 
terms of price of all the resistances to his production of that 
item or volume ; that alternative opportunities for gain 
through ministering to other demands are ordinarily of para- 
mount significance to him in arriving at this total of resist- 
ance ; that therefore cost of production, as the limitation 
on the supply of any one good, resolves itself commonly and 
mainly into the resisting appeal of alternative and competing 
demands ; and that the marginality of any entrepreneur in 
producing, or the marginality of any of the factors of pro- 
duction in his employ, can be significant for price only as 
indicating different and particular directions of infiuence 
upon the aggregate supply of products offered upon the 
market. 

Our next investigation will concern itself with the relation 
between the need or desire felt by an individual for a com- 
modity and his disposition to pay money to obtain it, or to 
sacrifice money to keep it — the relation, that is to say, be- 
tween utility and demand. It will be made clear that utility 
is purely a relation to an individual, and that the utility of the 
good to him is merely one way, the technical way, of express- 
ing the fact that he wants it ; that no such thing as social 
utility is known to the competitive market ; that the mere 
fact of utility, the mere existence of a good, does not suffice 



84 THE ECONOMICS OF ENTERPRISE 

to explain the disposition of an individual to pay a price for 
it ; it must also be a scarce good — a good having what is 
known as margifial utility. Thus the precise relations be- 
tween utility and marginal utility will come under examina- 
tion : it will be made clear not only that the individual's offer 
of money for a good, his demand, is not determined either by 
the utility of the good or by its marginal utility — though 
conditioned on the presence of both — but also that his de- 
mand cannot be measured either by the utility or by the mar- 
ginal utility of the good, and cannot measure either ; that the 
idisposition of the individual to pay a price for a good is the 
outcome of his comparison of the marginal utility of the 
good in question with the marginal utility of something else 
to be had for his money ; and that a marginal price-offer ex- 
presses the point of indifference between alternative applica- 
tions of an individual's purchasing power. It must, then, be 
so much the more clear that market price, as merely the equat- 
ing point between the total demand for a particular good and 
the total supply of that good, cannot measure either utility 
or marginal utility or be measured by either. 



CHAPTER VII 

UTILITY : DEMAND : DEMAND WITH SUPPLY 

Demand and supply related to price. — Market price is 
always and everywhere, and for every marketed fact, the 
point of adjustment between demand and supply. Nor is 
there any market price possible on terms other than of this 
adjustment. Increase the demand for any good, the supply 
remaining the same, and the price rises. Increase the supply, 
the demand remaining unchanged, and the price falls. 
Demand and supply make something analogous to an alge- 
braic equation. Any change in either side of the equation 
means a change in the value of x, a new point of adjustment 
by virtue of which the equilibrium is established in the new 
equation. 

Therefore, always and everywhere, no change can take 
place in the price of a good otherwise than as a result of a 
change in the demand for it or in the supply of it or in both. 
It is easily deduced, also, that no good can ever command a 
price unless there is a demand for it. Nor, on the other 
hand, can any good attain to a price unless the supply of 
it is limited relatively to the need for it. One pays for a 
thing only because he has to pay — or thinks he has — 
in order to get it. Our problem of market price divides, 
then, into two subordinate problems or aspects, demand and 
supply, each of which requires its separate examination. Sup- 
ply has just been analyzed ; we now come to the demand : but 
as preliminary to demand and as the foundation and explana- 
tion of it, we have first to consider utility and marginal utility. 

Utility. — No man would ever pay for a thing unless he 
wanted it. The fact that a thing is wanted, that it responds 
to a desire, is called the utility of it. In a certain sense it 
may be said that one wants the thing because it is useful 

85 



86 THE ECONOMICS OF ENTERPRISE 

to him — because, that is, it is appropriate to his needs. 
Perhaps, however, the truth is rather with those who in- 
sist that primarily we do not desire things because they are 
useful to us or give us pleasure, but rather that they are use- 
ful to us or give us pleasure because we desire them. Just 
as the chicken pecks its way out of its shell without fore- 
knowledge of the glories of the outside day, and immedi- 
ately upon exit picks up a grain or two of sand, nowise in- 
terested in the near-by gratification of its pungent flavor or 
in the faraway joys of a well-sanded digestion, just so human 
instincts and tastes and impulses reach their time, and spon- 
taneously activities press forward to expression; rattles 
wane, and dolls wax, while in later succession sleds and 
canes and sweethearts and homes and offspring and offices 
and professorships successively crowd upon the stage of 
human activity. Things move from indifference through 
gratification to satiation, as men change in their equipment 
of desires and tastes and sympathies. And when a thing 
comes to give us pleasure, it does so merely because we have 
come to like it. 

Utility is desiredness. — At any rate, this view of desire 
harmonizes best with the concept of economic utility. Util- 
ity is the mere fact that a thing is desired. There is in the 
term no slightest implication of the commendable character 
of the desire or of the good sense of its satisfaction. Men 
put forth effort and undergo privation to get whisky, cigars, 
automobiles, and burglars' jimmies, as well as for food, or 
statuary, or harvest machinery. So long as men are in- 
fluenced by evil purpose or by ignorance to buy and sell 
foolishness and evil, just so long these desires must be recog- 
nized as economic facts and the commodities as of market 
standing. Whether we like it or not, utility as an economic 
concept means simply adaptability to human desire. 

And therefore, in this sense to say that a thing has utility, 
or is a good, is nothing more than to say that some one wants 
it ; or, if it is anything more than this, it is so much the worse. 
Utility is not a quality of a thing but is simply a relation be- 
tween an objective, external fact and a desiring human being. 
Whether or not any qualities are anything more than mere 



UTILITY, DEMAND, SUPPLY 87 

relationships, utility, at all events, is nothing more. As the 
human being changes, the utility changes — may become 
greater or may disappear entirely. As well say that the 
northness of a thing, relatively to any second thing, lies all 
in the first thing, as to say that utility inheres in the objec- 
tive fact. Whether anything is north or south of you de- 
pends on where you are. 

All qualities are relations. — This fundamental principle of the 
relativity of all qualities has long been clear enough to the philoso- 
phers — and to some poets. What we hear or what we see or what 
we feel is no test of what really is. We are in touch with the out- 
side world only through the intermediary of our senses. Every- 
thing external comes to us as reported through our senses and inter- 
preted by our perceptions. What is opaque to the light rays that 
we can see may afford no obstacle to other rays to which we are 
blind. Some heat rays affect us also as light rays ; others do not ; 
and all might equally well do both, or do neither, according to our 
apparatus of appreciation. What lies in our experience is no test 
of what is ; on the other hand, it may be said with equal truth that 
experience is all there is for us. What, for example, does the insect 
hear? So far as we can be certain, it may see what we hear or hear 
what we see. The rose may send its articulate call to the humming 
bird, or the lily to the moth. To the vast regions of vibratory 
movement, from the few thousand aerial pulsations per second of the 
shrillest tone up to the miUions per second which we first appreciate 
as light and heat, we are entirely insensible. In the psychological 
sense Niagara did not roar before there were ears ; there is no drum- 
ming if the drumsticks vainly beat the air, never impinging upon 
any drumhead. Thus, for other ears than ours, or for ears such as 
ours might be, the whole universe may be travailing in shriek and 
groan and varied uproar: or it may be musical with chant and 
choral and dulcet murmurings — no star of it all but is " quiring to 
the young-eyed cherubins " — no rose of it anywhere but some- 
how, also, is a throat. It was, then, in no sheer poetic fantasy, but 
with a basis of strict scientific possibility, that Dryden declared the 
beams of nature to be laid every one in music ; the spheres starting 
on their courses in a burst of melody, all beating time to " the 
cadence of the whirling world that dances round the sun." ^ 

^George Eliot, also, emphasizing that wholesome dullness of 
human wit that somehow finds comfort against the most intol- 
erable of human ills in the sheer fact that they are commonplace 



88 THE ECONOMICS OF ENTERPRISE 

Not as literature or as poetic fantasy is all this to our purpose. 
Later it will have something to say for the meaning and the test of 
economic productivity ; but it helps now toward seeing that accu- 
rately there are no attributes of things, in the sense of something 
intrinsic, or objective, or in any way inhering solely in the facts of 
the exterior world. Utility — serviceability, usefulness — exists 
only as relative to a human desire, and ultimately means nothing 
more than that the thing is wanted. 

Marginal utility. — We have seen that no one is concerned 
to get possession of any particular item of commodity that 
is so plenty as to be had for the taking. Where the supply 
outruns the need we call the commodity a free good — air, 
for example. This, however, does not imply that it thereby 
ceases to be a good — that all items of it lack utility — but 
only that not all of the items can have utility at once. If 
some are to be serviceably used, this can be only on the 
condition that some others become surplus items. It would 
not at all matter that some were lost ; there would be plenty 
left. 

Many commodities which are not markedly scarce rela- 

or universal, writes : " That element of tragedy which lies in the 
very fact of frequency has not yet WTOught itself into the coarse 
emotion of manldnd ; and perhaps our frames could hardly bear 
much of it. If we had a keen vision and feeling of all ordinary 
human life, it would be like hearing the grass grow and the squirrel's 
heart beat, and v/e shoiUd die of that roar which lies on the other 
side of silence." — Middlemarch. 

And the same keen-minded novelist, who was in turn philoso- 
pher, poet, and scientist, also writes : 

" Fairy folk a-listening 
Hear the seed sprout in the spring, 
And for music to their dance 
Hear the hedgerows wake from trance ; 
Sap that trembles into buds 
Sending little rhythmic floods 
Of fairy sound in fairy ears. 
Thus all beauty that appears 
Has birth as sound to finer sense 
And lighter-clad intelligence." 

— Daniel Deronda. 



UTILITY, DEMAND, SUPPLY 89 

tively to the need still do not entirely cover the need ; there 
is no surplus. There is, that is to say, no single item which 
is not capable of meeting a want, consistently with all other 
items finding their respective niches of service ; some indi- 
vidual is always to be found who would be glad of more; 
no item of the whole stock presents a zero utility ; there is a 
marginal utility to the stock. 

This principle is perhaps easier to grasp if we assume that a given 
individual has a stock of say ten items of any particular good — say 
bushels of wheat, or cartridges, or dollars. Suppose, now, that he 
loses one of the items. Among the various different wants to 
which any one of these items would equally well minister, which 
want will go unsatisfied? It would evidently be the least pressing 
among all the wants. The importance then of this least pressing 
want expresses the significance of the loss of any one item out of the 
entire series or stock of goods. This least significance or least 
utility in the stock is the marginal utility of that stock. 

But, now, when nine items rem^ain, the desire which will be 
thwarted of satisfaction if one further item is lost is a stronger desire. 
Thus, the marginal utility attaching to the stock of nine items is 
evidently greater than that attaching to the stock of ten. So with 
each successive reduction in the total stock a new and greater utility 
comes to stand as the marginal utility. The utility of one item, 
when it is the sole item possessed, may possibly be great beyond 
measure — the issue of life or death depending upon its possession. 

Approaching the principle from the other direction, the same 
doctrine would look something as follows : As each successive item 
is added to the supply of any particular thing at any particular 
time, one's wants become less intense. Thirst is less insistent after 
the first glass of water, hunger ordinarily less keen with each succes- 
sive sandwich or order of meat or of pie. That is to say, each 
separate desire is satiable. It is unnecessary for the present to in- 
quire whether the same statement holds for the aggregate of one's 
desires, or whether rather, as old desires are relaxing in intensity, 
new desires are not in turn constantly emerging. Our present prob- 
lem, the adjustment of market price, has to do with only one 
commodity at a time, and, therefore, only with the way in which 
wants affect the price of that one commodity. As leading up to the 
disposition to pay a price, though not directly determining this 
disposition, utility and its derivative, marginal utility, become im- 
portant. 



90 THE ECONOMICS OF ENTERPRISE 

This principle, then, of the satiabihty of all desires — the falling 
utility of successive increments in the stock of goods of any one 
individual — leads again to the recognition of what is known as 
marginal (or final) utilitij. Successive increments of supply call 
forth a continually diminishing response of desire. Marginal 
utility is the least utility attaching to — or depending upon — the 
possession of any one item of commodity out of the individual's 
actual stock. If his stock consist of only one item, this also is a 
marginal item in our sense of the term. 

This is very simple to grasp for cases where one is either sub- 
tracting item after item from his stock or adding item after item 
to his stock. He grows more keen in interest with each loss, less 
keen with each additional item. But consider once again the prob- 
lem, if the case be not conceived as one of a succession of com- 
modity items, — if no item, that is, be regarded as coming early or 
late as compared with any other, but as portions of a stock already 
on hand : which now is the marginal item — the item of least 
promise of service? All have equal possibilities ; it is, therefore, no 
longer possible to regard any one item as entitled, as against any 
other, to the marginal place. But, even so, it is possible, as we have 
seen, to regard any item as marginal, in the sense that the loss of it 
would be felt as involving only the degree of utility depending upon 
the possession of it, and as significant, therefore, only according to 
the strength of the desire frustrate by the loss of it. This utility 
would be the equivalent of the utility of the last item in the series 
were the different items acquired or considered successively. 

And note again that it by no means follows that all of the items are 
marginal because any one of them may be so. Not all items of a 
stock can be marginal at once. No one item can be regarded as 
marginal excepting on such terms of regrouping as shall impose the 
non-marginal position upon all the others. But it is, of course, 
possible to treat the entire series as an indivisible group — as a 
unit — and therefore to estimate the aggregate marginal utility of 
the group taken as a unit. The loss of utihty that will be suffered 
in the loss of the entire stock is clearly not the riiarginal utility times 
the number of items. The sum of the utilities of each of the items 
regarded separately is the utility of a stock considered as a mar- 
ginal group, or unit. It is a case of addition and not of multi- 
pHcation. 

Nor is the marginal item to be taken to indicate necessarily the 
item on the margin of disappearing utihty — an item barely worth 
having, an item just on the hither side of satiation. There are, 



UTILITY, DEMAND, SUPPLY 91 

it is true, marginal cases of this sort, and other marginal cases 
approaching closely to it ; but any one of these is only one case out 
of countless different cases of marginahty. The point of satiation 
is only one of the cases of marginal utility, not at all the only one. 
The least utihty of whatever stock the individual has is the mar- 
ginal utiUty for that stock. 

Marginal utility and scarcity. — In the foregoing chapter 
were traced the causes which fix or limit supply in the price 
equation. A further step may now be taken : The existence 
of marginal utility to the individual — and likewise the 
size of the marginal utility at any particular time — depends 
upon the volume of his supply. Only on terms of some limit 
upon the supply can the marginal item afford utility. With 
the supply outrunning the need, some items of the supply 
must be useless, or, as it might possibly be phrased, have 
a marginal utility of zero. And further : It is only as condi- 
tioned upon the existence of marginal utility that any good 
can command a price. Where the marginal utility is zero, 
no one will pay anything for any single item of the supply, 
since no one would have to pay in order to have the item. 
Air, for example, is of the highest possible utility — some of 
it — but commands no price because, commonly, there is 
air in more than plenty. So, often or usually, with water. 
On the other hand, scarcity alone gives no basis for price; 
else mosquitoes would be valuable in winter. Both utility 
and scarcity are thus fundamental conditions to the emergence 
of price, — utility on the demand side as the basis of the 
disposition to pay if necessary — scarcity on the supply side 
as the necessity for making the payment. 

Marginal utility and price-offer. — It does not follow, however, 
that always when utility is recognized, the want felt, payment will be 
made. For note carefully that desire and demand are not inter- 
changeable terms. The boy with his nose glued to the window of the 
candy store represents desire enough for candy, but no demand, 
else he would be on the inside of the shop. Economic demand has 
desire for its condition, but it is more than desire ; it is desire coupled 
with purchasing power. The want alone signifies nothing in the 
market. That things are wanted — have utility — is m±erely a 
necessary condition to economic demand. 



92 THE ECONOMICS OF ENTERPRISE 

Marginal utilitj^ and price-offer incommensurable. — 
But great care must be taken to avoid the widespread and 
pernicious error of identifying marginal utility with marginal 
price-offer. Do we really know how much one needs a thing 
by knowing what he will pay for it — that the poor man 
wants his $1500 house no more than the rich man his 
$1500 automobile? Yet over and over again it is asserted 
— by economists who ought to know better — that the 
marginal utility to the bidder determines his bid ; or that 
his bid expresses his marginal utility ; or that the marginal 
bid expresses the marginal utility of the commodity to 
buyers in general; or that the market price expresses the 
marginal utility; or that the marginal utility determines, 
or is commensurate with, the market price. In truth, no 
one of all these formulations is defensible. Each is the result 
of slipshod thinking — not better than a blunder, but never- 
theless a blunder of a very specious and dangerous sort. 
Yet the mistake is not difficult to detect. In the hat illus- 
tration the price was fixed, say, at $5, $5 being the maximum 
bid of the marginal buyer, say your own bid. Why should 
your bid be $5 while that of another man was 6, and that of 
still another only 4 or 3 or 1 ? Surely the marginal utility 
of the hat to each bidder must have something to do with his 
bid ; no one would bid at all if there were no marginal utility 
for him in the hat. But why was your maximum bid at 
$5? Doubtless, other things being equal, the greater the 
marginal utility, the nigher the bid, and the smaller the 
marginal utility the lower the bid. You draw the line at 
$5 because — as you might put it — you can't afford any 
more for the hat, or because it isn't worth any more than 
$5 for you. Yes, — but why ? Plainly because with the 
hat costing more than $5, you would rather buy something 
else, now or later, with your money. If you were very rich, 
you would feel otherwise about the $5 outlay, because then 
to buy the hat with the $5 would displace a much less urgent 
alternative need. So one may be willing to give to-day for 
bread double what he would have given a year ago, although 
only equally as hungry to-daJ^ The poor man goes without 
what the rich man purchases, not because of a smaller need 



UTILITY, DEMAND, SUPPLY 93 

for the thing under consideration, but because of a greater 
need for something else. The strength of the desire ^for 
other things is a necessary factor in his decision. Buyers 
are marginal, therefore, not by virtue of the absolute mar- 
ginal utility but only of the relative marginal utility. A 
wealth of illustrations, edifying to the point of weariness — 
about the cigar and the loaf of bread. Dives and Lazarus, 
the starving man and the man at the feast — ought long 
since to have placed this truth beyond the range of discussion 
or the danger of misconception. - The fact is that one decides \ 
to pay or not to pay a particular price for a good, not as a / 
question solely of his degree of need of it, but also of the \ 
necessity which the purchase of it imposes upon him of i 
going without some other marginal utility. No one is will- I 
ing to trade by the mere fact that he has become conscious 
of the importance to him of some particular article. He 
must have become similarly conscious with regard to that 
definite or indefinite something which, buying the first, he 
must forego. Marginal utility is a necessary step in the 
case, but it does not suffice ; not one, but two marginal 
utilities are necessary for the fixing of a price offer. Mar- 
ginality, that is to say, is an equality of ratio between com- 
peting marginal utilities : the thing in prospect is to the x 
thing foregone as 1 is to 1 or as 5 is to 5, etc. And this equal- . 
ity of ratio between the thing purchased and the thing fore- 
gone is the only characteristic which different marginal 
buyers have in common. They are willing to pay the same 
market price, and this by virtue of the same equality of 
ratio. Neither money in general nor any particular amount 
of money is adequate to measure or express utility. Mar- 
ginal utility is one thing, a real thing, but a thing carefully 
to be distinguished from that other real and important thing, 
marginal price offer. 

This process of comparing marginal utilities — this estimation of 
the significance of one thing in terms of another — is sometimes 
called subjective valuation, and the result called a subjective value — 
as over against the objective ratios between things established in 
the market and called market values. 



94 THE ECONOMICS OF ENTERPRISE 

Margins are never determinants. — But this vagueness of 
thought is still more serious when it is said, as it often is, 
that the marginal offer fixes the price. If, indeed, the offer 
is precisely on the margin, a case of complete indifference 
between the purchase and the non-purchase, the maximum 
marginal offer is truly commensurate with the market price. 
But this is worlds away from the assertion that the marginal 
traders — the buyer alone, or buyer and seller together — 
are the determinants of the price. All the different buyers 
and all the different sellers contribute to determine the 
price. " The withdrawal of iron from any one of its 
necessary uses would have just the same influence on its 
value as the withdrawal from its marginal use." ^ The 
marginal item, whether of demand or supply, differs from 
any other item only that through it, as marginal increment, 
a determination may schematically be made of just what 
effect it, or any other single item, has had upon the price 
adjustment, measurement being made from the point at 
which all the other forces in the market would otherwise 
have left the price. Not to the soldier who fires the last 
gun is the victory to be accounted, nor is the smallest boy 
who touches off a firecracker to be held responsible for the 
Fourth-of-July hubbub. If there is truly a marginal buyer, 
the marginal price must coincide with his demand price ; 
but neither the point of adjustment, nor the buyer at this 
point, is the determinant of price. This buyer is the least 
forceful among all the buyers. True it is that, if he were 
not in the case, the price would have been other ; but so is 
this true of each of the other buyers. The marginal demand 
is one among the whole number of demands, and as such has 
its part in the resulting adjustment; but it is the entire 
demand in equilibrium with the entire supply that gives 
this market adjustment. Almost as well speak of the child 
who chases the wave up and down the shingle as fixing the 
wave-front, as to speak of any margin as determining the 
price. 

All talk, then, of the fixation of price by either or both of 

1 Marshall, Principles of Economics, Fourth Ed., p. 580, n. 



UTILITY, DEMAND, SUPPLY 95 

the margins is nonsense. It would be nearer the truth, in- 
deed, to say that each purchaser sells as the result of the price 
and that each different buyer accepts the price offer which 
the market holds out to him. At the most, the market 
price is simply commensurate with the marginal offer or 
with the marginal selling price. It is not the result of either 
more than of the other ; demand has no more to do with price 
than has supply. Nor is the price rightly to be regarded 
as the result of both margins together. It is the result of 
all the price offers over against all the commodities offered. 
.Price is adjusted at the margin and not by the margin — 
where, indeed, either manner of statement accurately holds. 
To assert that these marginal traders are, as against the 
opposing in-pressing volumes of commodities and of pur- 
chasing power, the causal facts in fixing the price calls to 
mind ^Esop's tale of how the fly sat on the axle tree of the 
chariot and said, " What a dust do I raise ! " 

Margins participate in causation. — - It is, however, not a 
full and adequate expression of the truth to say that the 
marginal trades are merely the results of the price. In the 
main, of course, whether any man is marginal in producing 
or selling depends on the conditions which he faces. Mar- 
ginal buying, also, is rather the effect of the price than the 
cause of it ; the total situation is directive of each individual 
in it. None the less, however, must each be recognized as 
contributing to the making of the total situation. The 
buyer buys because the price attracts him, but, as one among 
the demands, helps to determine or modify the price. The 
producer accepts the offer which the market price holds out 
to him, but, in turn, in placing goods upon the market, 
modifies the price. It is, indeed, precisely through this in- 
fluence of changing supplies of product to modify an existing 
price that cost of production has to do with price at all. 
The logical difficulty in keeping cause and effect apart is 
not rare in the study of actual phenomena. There are 
mutual reactions ; that which was effect becomes in turn a 
cause. If, then, there is perplexity in thinking of any par- 
ticular fact as at the same time both cause and effect, let 
one imagine himself as jumping — the last person — upon 



96 THE ECONOMICS OF ENTERPRISE 

a crowded raft and sinking with it ; does he sink the others 
or do they sink him ? 

The higgling area. — Occasionally, however, cases occur in 
which even the marginal buyer is disposed, if necessary, to 
pay a price appreciably higher than the minimum at which 
the seller could be induced to sell — precisely as in the iso- 
lated horse trade, one man might be willing to pay as high 
as one hundred dollars for a horse which the owner would 
sell at fifty dollars if he could not get more. With a larger 
number of seekers and of sellers, this intra-marginal interval 
is likely to be much narrower ; but even so, the lowest-price 
buyer may be willing to pay something more than the high- 
est-price seller must receive. These intra-marginal areas 
for higgling — these opportunities for ruse and guile and 
strategy, and even for occasional feats of lying — are not 
rare. It is sometimes asserted that within this area, where it 
exists, the marginal traders do actually fix the price, in the 
sense merely that, by doing the higgling, they give the last 
touches to the adjustment ; make it precise ; finish it; put, 
so to speak, a fine edge upon it. But not even so much as 
this can be true for the vast majority of cases. With an 
indefinite number of sellers and buyers in the market, it can 
hardly be true that in order to reach a price adjustment any 
particular pair of individuals must get together. They 
certainly need not ; all that the perfect market assumes is 
that such a price be reached as shall leave no one, having the 
willingness to sell below the price, to cry his wares without 
a purchaser, and as shall leave unsupplied no purchaser who 
would yet search for the commodity at any slightest fraction 
above the price established. The price which will fulfill 
these conditions may be estabUshed in no matter what 
way; it is sufficient that it will not be disturbed. The 
chances are evidently thousands to one that the marginal 
traders will not get together to higgle, and it is by no means 
clear that these are the traders of especially marked dis- 
position to higgle. That they are the most indifferent of 
all, in point of the volume of differential advantages (con- 
sumers' surpluses) at stake, may not indeed fairly argue that 
they are the least interested in the particular penny or two 



UTILITY, DEMAND, SUPPLY 97 

to be contended for ; but in actual fact not the number of 
pennies at stake, but the kind of people playing for these 
pennies, will mostly determine who will do the higgling and 
how much higgling will be done. Women of the shopping 
and bargain-counter mania deserve especial attention in 
this connection. There is no sufficient reason for supposing 
them to be purchasers at or near the margin of indifference. 

All utility is relative to the individual. — The foregoing discussion 

should, by implication, have made it clear that utility and mar- 
ginal utility and relative marginal utility have to do solely with the 
particular individual as an account of the way in which he arrives 
at Ms purely personal and individual decision to become a purchaser 
at not more than a particular price — to enter his own demand as 
one among the great total of demands. Strictly speaking, there is no 
such thing as the comparison of the utihty to one person with the 
utility to another. Men differ in desires and in the degree and man- 
ner in which things appeal or appear to offer service. Only so 
far as, in the general likeness of one man to another, human beings 
approach to a perfect similarity, or only so far as for some purposes 
the individual differences may safely be overlooked, is there room 
for talk of group aggregates of utilitj^, or is there purpose or safety 
in the notion of social utility or of social sacrifice or of social pain. 
But for the problems of market price these individual differences 
will not down. Men are unlike not only in tastes, in intensity and 
vividness of feeling and of desire, and in the relative strength of 
needs and desires, but even more in the pecuniary ability to com- 
mand the appropriate satisfactions. Any homogeneity of utility, 
any attempt, for the purposes of the price problem, to force different 
men into any other common denominator than this very obvious 
one of price-offer itseff, is possible only at the sacrifice of all clear 
thinking. It is, indeed, worse than this ; for it removes any prob- 
lem to think about. As Pudd'nhead Wilson observed : "It were 
not best that we should all think alike ; it is difference of opinion 
that makes horse races." And so of speculation : and so, in fact, 
of all trading. Abstracting from the differences between men in 
order to explain trade, all trade becomes impossible. 

Is demand price sufficient ? — It is, however, sometimes urged 
that no other fact or assumption is necessary in the discussion of 
demand than this one of willingness to pay in terms of money; 
that if the reduction of all money demand into a utility jelly is 

H 



98 THE ECONOMICS OF ENTERPRISE 

nonsense, the more distinctly individualistic method is at best 
merely " useless fatigation " — and is really even worse. Why 
not stop with the fact that the different men have different price 
paying dispositions and let it go at that? The further analysis is 
admittedly merely an attempt to furnish an underpinning to the 
phenomena of price offers. Instead of disturbing or changing the 
results of the earlier economists, this new marginal utility school of 
thought does nothing more — it is said — than to supplement and 
to complete : is it worth the bother ? 

Impulsive or unreflective activity. — But these objectors shortly 
unmask a more serious attack : they assert that the marginal 
utility analysis rationalizes human activity out of all semblance to 
reality. Even with utility shorn of any implication that human 
desires concern themselves exclusively with pleasure and pain, and 
implying nothing but the mere fact of want, this analysis, it is said, 
overlooks the fact that man in most of his activities is neither re- 
flective nor deliberative ; he does not weigh and balance in the man- 
ner imputed to him ; he just acts ; he is not a calculating machine. 
More often — not always, to be sure — he acts from "impulse and 
habit and irreflection. Instinct and habit and spontaneity^ manifest 
themselves in the economic world as truly as in the world of play 
or of romance. As between automaton and calculating machine, 
man is nearer the automaton. The difficulty with the marginal 
analysis is, in short, — these objectors insist, — that it has carried 
the logic of the case overfar — a logic that is sometimes there, and 
might always be there, but more commonly is not there — and has 
made this logic explain where it really does not apply. It has com- 
pletely rationalized — it is urged — that which rarely more than 
remotely approximates the rational, and commonly does not even 
do that. It has translated the logic implicit in the marginal pro- 
cess into a conscious and complete and actual mental process. As 
the chicken pecks its way out of the shell instinctively, irreflectively, 
uncalculatingly, and purposelessly ; as one wakens in the morning 
according to the inner time clock set at bedtime ; as the hypnotic 
patient carries out days later the mandate given during his for- 
gotten trance experience ; as the idee fixe of pathological mental 
conditions, or even of habit, guards one against all influence of argu- 
ment or of appeal ; as the resolve of yesterday remains by that mere 
fact the cherished goal of to-day : so do all of us in a wide domain 
of our activities, move — it is argued — in a half blind trance of 
inherited impulses and instincts, and of acquired tendencies and 
aims. So much of our action is essentially reflex that there is more 
question whether any of it is altogether calculated and purposeful 



UTILITY, DEMAND, SUPPLY 99 

than whether all of it is. Habit and custom and instinct and im- 
pulse, it is said, rather than rational processes of estimate and of 
comparison, are the adequate explanations — if explanations there 
are of any sort — for the conduct of human beings on the market as 
well as off the market. Granted even that in some cases the cal- 
culation process explains, this makes it a vaUd explanation only for 
these cases. In short, the psychology of political economy is hope- 
lessly wrong — so these skeptics insist — so far as it rests upon the 
marginal utility dogma. 

On the face of the argument this attack is certainly disconcerting. 
And it is no defense to point out that these critics purpose nothing 
better in the place of that which they attack — that, giving them 
their way, the situation reverts to its ancient classic case, where 
price offer was taken either as an obvious and simple and self- 
explanatory fact or, — as these later folk would have it, — as a 
thing inscrutable in its ultimate mystery and as a definitive datum 
in the science. It must be admitted that an obviously bad explana- 
tion is not made good by the fact that nothing better is offered. To 
clear away old errors is often a necessary step in getting a problem 
rightly stated ; and to discover that there is yet an unsolved prob- 
lem, and to state this problem, is itseh a step in advance. 

Hedonistic implications gratuitous. — But first it is to be said 
that in the notion of utility there is no necessary implication of any 
hedonistic theory of desire. Doubtless the word has hedonistic 
connotations — the more the pity — and might perhaps be better 
replaced by some other term, or even be abandoned out of hand. 
The utility of an object need mean nothing more, and should be 
taken to mean nothing more, than one way of expressing the simple 
fact that the object is desired. Whether a desire or want traces 
back to instinct or to impulse or to experience, is an inquiry not as 
to the existence of the want but as to the genesis of the want. This 
is not especially the economist's task, nor is he especially equipped 
for its performance, nor is the promise of success especially alluring 
for him — or for any one else. It is enough for the economist that 
the desire exists, that the external thing attracts : thereby it is a 
good in the mere sense that it is desired ; one wants it. Thus there 
is no force in the assertion that instinct and impulse and spontaneity 
lie, in greater or less degree, back of desire. They certainly do ; 
but there is still the desire ; and only in this sense is there utility. 
And utility in this sense there clearly is. If the present wish to pur- 
chase is merely the expression of the habit, it is, nevertheless, a pres- 
ent wish. Doubtless one might — ' were the history of the case a 



100 THE ECONOMICS OF ENTERPRISE 

pressing inquiry — ask how and why one got into the habit : why 
has it so long been the custom to wish ? We stop merely with the 
wish — hence the utility. 

Calculation and action. — Not so easily disposed of is the other 
aspect of the attack. Granted the desires, — that is to say, the 
different utilities, — is it true that a man, having estimated each of 
two of these separately, now proceeds to a conscious and rational 
comparison of these two as a necessary step in arriving at some 
definite limit upon his price offer, or in deciding whether to buy or 
not to buy at a particular price ? Do men really have their respec- 
tive maxima in bidding ? Or is this also to impute to them a some- 
thing that they might have, and perhaps rationally ought to have, 
and may occasionally have, but commonly do not have? When, for 
example, one goes to town to get him a hat, does he know how 
high, if necessary, he will go in price? Or, when he gets there, does 
he then find out? Or even after he has bought the hat, could he 
tell? 

Excepting in marginal cases, or in cases close to the margin, this 
assumed definiteness is surely not present : but it is still true that men 
do choose. The real issue is as to how far this is the result of a 
calculated and considered comparison of the advantages of buying or 
of the strength of the desire to buy, as over against the advantages 
of buying now or later something else, or of the strength of the desire 
to buy something else. For the vast majority of cases is not this 
marginal analysis an over-rationalization, or even a rationalized 
caricature, of what actually takes place ? 

Probably so — if the marginal analysis really implies all this that 
is imputed to it. But it still stands true that men have desires, — 
many desires for many different things, — and that these desires 
conflict with one another and defeat one another of satisfaction. 
The individual has a limited purchasing power, and the buying of 
one thing, therefore, means going without some other thing. And 
clearly enough the buyer knows this; yet somehow he gets to a 
choice of what he shall buy. He has to decide ; and his decision, as 
he knows, is really the fulfilling of one desire on terms of thwarting 
another. Most men, it is true, do not know how high they will pay, 
but only that they will pay more than any probable market require- 
ment will impose. Their choice is so easy between buying and not 
buying, between having this or having something else in its place, 
that the decision is reached with so little of consideration that it 
hardly seems a choice at all. But the choice is, nevertheless, actual, 
despite the fact that it is easy and simple and that no maximum bid 
needs be precisely fixed. The utility analysis is nothing more than 



UTILITY, DEMAND, SUPPLY 101 

a schematic and very abstract account of this process of making 
these choices. In the marginal case there is more of doubt and 
hesitation, more occasion for comparing and balancing. That the 
marginal case may itself be one in which habit or instinct or impulse, 
on one or on both sides of the alternative presented, determines the 
actual decision is not an objection. There is still the alternative; 
and, if the case is really marginal, it is a case in which the choice is 
so close as to demand conscious decision. Most men, for example, 
have no difficulty in deciding which particular woman to seek in 
marriage ; the rest are not seriously in the running. But the choice 
is there. Another man, as with Eugene Field in his doubt as be- 
tween the charming mother and her no less charming daughter, 
may long " Like an ass between two stacks . . . simply stand 
and dodder." This man is marginal. His conflicting desires are 
near to an equality of appeal.^ 

The adequacy of generalizations. — But after all it is no necessary 
and imperative part of the case for the defense to assert that this 
principle of marginal choice takes account of every possible influence 
in all the complexity of human impulses, motives, and activity. It 
is rare, indeed, that any scientific generalization attains to this 
supreme degree of accuracy and exhaustiveness ; possibly the pres- 
ent generalization does not. Many economic generalizations cer- 
tainly do not, as, for example, the assumption that in economic 
affairs all men act in entire selfishness. All that can justifiably be 
asked here is whether this is prevailingly true in a degree to justify 
the choice of selfish motive as the leading and controUing influence. 
Minor disturbing factors may then be trusted to be inconsiderable in 
effect or to offset or cancel one another. 

It is, in truth, in the very nature of scientific generalization that 

^But out of a case of absolute indifference — complete and per- 
fect marginality — can any decision or action follow? As in 
mechanics, must there not occur something like a dead center? 
There are, in fact, cases of pathological mental conditions in which 
the patient brushes, for example, upon the problem of which slipper 
to put on first, and, there being no particular reason for preference, 
hangs fire indefinitely between the alternatives — completely non- 
plused. 

In normal psychology, however, all attention and all emotion 
are rhythmical or vibratory — Hke all physical and physiological 
movements. Therefore a precise indifference must be temporary, 
and must be displaced by alternations from one side to the other 
of the line of the dead center, as the emphasis of desire or attention 
shifts. 



102 THE ECONOMICS OF ENTERPRISE 

it often does violence to the infinite complexity of the actual con- 
crete phenomena. It must often abstract — must often select 
some leading force or aspect in a problem, and dispose of secondary 
influences by this method of offset, or under the assumption that 
other things are equal. So, even if this marginal-utility generaliza- 
tion were admittedly of this sort, its justification need not be hope- 
less. The inductive method, vaUd in other fields of science, could 
be appealed to here : A tentative generalization is suggested by 
the facts. If this generalization, when applied in the widest way 
to the entire field of facts, is supported by them, in the sense that it 
affords an intelligible and consistent explanation of them, a scien- 
tific law is provisionally established. Precisely of this sort is the 
explanation offered under the marginal utility doctrine : (1) it is 
probable that by introspection of his mental processes each indi- 
vidual will find that, in a general way in making his purchases, he 
acts in conformity with the principle proposed ; (2) the generaliza- 
tion then meets strong inductive verification in the fact that prices 
do adjust upon the market and do rise and fall in the precise manner 
which the marginal principle requires and foretells ; the facts cor- 
roborate the theory. For, after all, why is it that as prices rise 
many prospective purchasers are retired and spend their money 
for other things, and that as prices fall lower levels of price-paying 
disposition are uncovered and purchasing increases? Why is it 
that no one of us will submit to unlimited advances in price — that as 
goods go up in price we reduce or cease our purchases? Our theory 
does ex-plain these market movements on the demand side, and ex- 
plains them adequately, and explains them in general conformity 
with human nature. The reasoning or the analysis may, it is true, 
be later supplemented by further study or may be modified in detail ; 
but it will hardly be subjected to any general discrediting. 
Rightly understood, — utihty meaning merely the fact that a 
thing is wanted, — the marginal utihty doctrine is almost an 
axiom. 

Market demand : Summary. — The fact that a thing is 
desired we call its utility : having utility it thereby comes to 
be called a good. 

As bearing on price, utility must be a matter entirely 
within the individual psychology, since desire is so. 

All market demands are price demands; desire, as such, 
does not appear in the market ; utility without purchasing 
power is irrelevant to market movements. 



UTILITY, DEMAND, SUPPLY 103 

There could, however, be no price demand in the absence 
of utihty; money will not be paid for a thing if no desire 
exists for the thing. 

But whether money will be paid, and how much, depends, 
in part, upon the relative strength of the desire for other 
things, their utility. 

But the strength of the desire for any good, as this desire 
bears upon price offer, is not a question of the utility of the 
good in general or in the mass or in the average, but a question 
of the added utility which will accrue with the addition of 
the particular item under consideration. 

For the bidder, this additional utility with the added 
unit — or, for the seller, the loss in aggregate utility attend- 
ing the loss of a unit — is termed the marginal utility. 

Utility may exist without scarcity, but marginal utility 
cannot. Mathematically speaking, the marginal utility of , 
goods that are not scarce is zero. ^ -^.l 

Thus the emergence of an individual's price offer is condi- ,1 
tioned by the presence not merely of utility, but of mar-- / 
ginal utility. 

(Marginal utility is, then, not exclusively a matter of 
desire; the intensity of the desire for the final unit implies 
a supply influence in the case.) 

The direction of the use of purchasing power — or the 
sale of goods for purchasing power — is a derivative not from 
one marginal utility alone but from a decision between al- 
ternative marginal utilities. 

Therefore an individual's utility curve may be plotted, 
or his price-offer curve for any particular commodity; or 
an aggregate, or social, price-offer curve; but no social 
utility curve. And no price offer anywhere is expressive 
of absolute, but only of relative, marginal utility. It would 
be possible, also, to interpret the ordinary market demand 
curve so as to report the varying volumes of a commodity 
which the market demand would absorb at a series of dif- 
ferent prices. 

Summary of Chapter : Money demands are not inscrutable 
data in the problem of price. They require explanation equally 



104 THE ECONOMICS OF ENTERPRISE 

with supply. Utility alone, the fact that an individual wants 
a thing, does not explain either the necessity that he pay for it 
or his disposition to pay for it. Unless the supply is limited, 
no one needs to pay. The limitation upon the supply, the 
scarcity of a useful thing relatively to the need, is funda- 
mental to the disposition of any individual to pay money, or 
anything else, for it. The satiability of any desire at any 
given time, the falling utility of each added item in an individ- 
ual's stock of any good, leads to the recognition of marginal 
utility — that utility attending the least important desire 
satisfied by any item in the stock — that desire which will be 
deprived of satisfaction with the loss of any one item. 

But marginal utility does not explain the disposition of any 
individual to pay a price. Not only must he have the pur- 
chasmg power, but also he must decide in what direction to 
apply it. To buy one thing means to go without an alterna- 
tive thing. Therefore the decision to purchase is arrived at 
only as a choice between competing marginal utilities. The 
steps, then, are from (1) utility to (2) marginal utility, 
thence to (3) the comparison of marginal utilities, and finally 
to (4) price offer. 

Marginality in demand means, then, merely that at any 
higher price for the good in question the individual would 
prefer to retain his purchasing power for some other use. To 
be above the margin means that the marginal utility of the 
good in question outranks by some greater or smaller differ- 
ential the marginal utility of any competing good. To be 
upon the margin is merely to recognize a ratio of equality 
between competing and alternative marginal utilities. It 
follows, then, that an individual's maximum money demand 
for a good implies nothing more as to the magnitude of 
the marginal utility to him, or as to the magnitude of the com- 
peting marginal utility, than is involved in the fact that 
these competing marginal utilities are approximately equal. 
Nor does the fact that two individuals are marginal at the 
same purchase price imply that the marginal utilities re- 
spectively involved are equal, but only that the ratios are 
the same between the utility in question and the utility 
foregone. And finally : utility being purely a relation to an 
individual, and men being different — their desires different 
and incommensurable, and their money resources different — 
there is no possibility of finding, either in the demand price 
of any individual or in the market price, any expression or 



UTILITY, DEMAND, SUPPLY 105 

measure of utility or of marginal utility. Utility at large, 
or social utility, therefore, is sheer nonsense for all purposes 
of the price analysis. 

Account having now been rendered of demand as it is re- 
lated to utility, and of supply as it is related to cost of 
production, and of demand and supply together as they are 
equated against each other in the process of price adjustment, 
it will be the task of the next chapter to show that cost of 
production — even with demand assumed and with cost in- 
terpreted to take account of displaced and competing oppor- 
tunity — is rather an indication of the direction in which a 
solution of the price problem is to be sought than an ulti- 
mate solution of the problem ; that it is purely an entrepre- 
neur computation, adequate and ultimate for the purposes 
of the entrepreneur in his separate and individual pursuit of 
private gain, and an inevitable and even a central fact in the 
competitive process, but neither adequate nor ultimate for 
the purposes of explaining market price ; that, as intended to 
offer an ultimate explanation of price, cost of production is, 
indeed, patently circuitous ; that it purports to explain the 
prices of products purely by an appeal to other prices — to 
the prices of the materials consumed, to the price wages of 
the labor applied, and to the price rents of the lands and in- 
struments employed. It will also be made clear that pre- 
cisely because the process of the distribution of wealth in 
present society is a price process — is, indeed, merely one 
phase or aspect of the price problem in general — the distrib- 
utive problem equally with the price problem finds no ulti- 
mate solution in cost of production ; that such, indeed, must 
be the case, since, for the most part, costs of production and 
distributive shares are merely two different names for one 
and the same thing. 



I 



CHAPTER VIII 

THE SIGNIFICANCE OF COST OF PRODUCTION 

What determines the cost. — In view of the foregoing dis- 
cussions, it must appear odd that economists should ever 
have been content with cost of production as an explanation 
either of the price of any one good or of the relative prices 
of different goods. In truth, however, they have never 
been generally content, so far as concerns the attempt to 
explain price by entrepreneur cost of production. Those 
cost explanations of market price which have commanded 
serious advocacy have all of them been attempts to delve 
beneath the mere entrepreneur pa3Tnents and to search 
out the causes determinative of these payments. Does the 
employer have to pay high wages? Some economists have 
explained this by the painfulness or danger or other dis- 
advantage attaching directly to the work required. And 
in those cases where the pay for the work is only relatively 
high, appeal has been made to the relatively great irksome- 
ness or painfulness. This view of the case really finds the 
determinant of the expense cost of the employer in the labor- 
pain cost of his employees. Fundamentally it is an employee 
cost doctrine and not an entrepreneur doctrine — or rather 
it finds in the pain cost of the employee the cause of the 
money cost of the employer. So, for example, the great 
economist Ricardo held that the relative prices of products 
are due to the relative amounts of labor involved in their 
production. But he was not the less emphatic in his insist- 
ence that prices were proportionate to the costs of the 
employer ; this was very clear to him. But these employer 
costs were in turn proportionate to the employees' labor 
burdens. Thus, the relative amounts of labor determined 
the relative expenses of the employers, and these relative 
expenses determined in their turn the relative prices ; whence 

106 



SIGNIFICANCE OF COST OF PRODUCTION 107 

it followed that the labor cost was the ultimate determinant 
of the market price. 

Does pain determine cost? — It is not at present worth 
while to go far in criticism of this doctrine. It simply is not 
true that the pay received for work is proportional to the 
pain or to the general unattractiveness of the work. The 
tvage is affected by the supply of laborers offering for the 
work, and this supply may in turn be seriously influenced 
by the unattractiveness of the work. But despite the un- 
attractiveness, the supply of men fit for nothing else is often 
so great that the wage is a low one, and low out of all pro- 
portion to the pains. Other occupations in turn are gener- 
ously rewarded despite the fact that they are exceptionally 
pleasant occupations ; compare the prima donna with the 
servant girl. On the whole it is perhaps more nearly true 
that the more attractive occupations get the higher rewards. 
And the Ricardian view is even more unsatisfactory as an ex- 
planation for the relative hire of different lands and of differ- 
ent sorts of other productive equipment than as an explana- 
tion of the prices of products. Pain appears, indeed, to be 
irrelevant to these particular compensations. 

But no matter how bad this labor-pain cost explanation 
of entrepreneur cost may be, it is still to our purpose as 
illustrative of the general unwillingness of economists to 
stop at mere entrepreneur cost as an ultimate explanation 
of market price. In truth no capable economist ever did 
so stop. Nor can we. The circuity in the argument is 
obvious : entrepreneur cost explains the price of the product 
by appealing to the prices of the productive factors. It 
traces the price of the product to the price of the costs en- 
tering into the product ; and forthwith it proceeds to explain 
the. prices of the productive factors — the costs — by the 
price of their joint product.^ 

^ " The price of pig 
Is something big ; 

Because its corn, you'll understand, 
Is high-priced, too ; 
Because it grew 
Upon the high-priced farming land. 



108 THE ECONOMICS OF ENTERPRISE 

But entrepreneur cost is superficial. — The truth clearly 
is that the labor-pain theory of price, purporting to base 
the entrepreneur level of price costs upon an underlying 
stratum of " real " costs, attempts to arrive at a fundamental 
explanation of price, and arrives merely at a false explana- 
tion; while the entrepreneur view of cost of production, 
in its care to remain a correct explanation, gives up the 
possibility of becoming an ultimate explanation. The entre- 
preneur doctrine of cost gets no further toward explaining 
the prices of products than to explain some prices by other 
prices — the price of the product by what the factors enter- 
ing into it cost. But this leaves these cost prices unex- 
plained. And if they are explained by the price of the prod- 
uct, this, in turn, leaves the price of the product without 
explanation. Nor does an appeal to opportunity cost re- 
lease us from the circuity or move us nearer to the funda- 
mentals in the problem. An opportunity to produce some- 
thing else is sacrificed in producing the actual product ; but 
it was an opportunity to produce another thing bearing a 
price ; and this other thing enters into our problem not as 
a foregone thing merely but as a priced thing, a displaced 
price product. Thus opportunity conceived as cost becomes 
a price fact, just as is the thing that is actually produced, 
and just as is each wage and material and rent item in the 
ordinary cost explanation of price. It is certainly necessary 
to take account of opportunity costs, precisely because the 
entrepreneur does actually take account of them in deciding 
whether or not to produce in any given line. They must 
be in the doctrine because they are in the facts. It is, in- 
deed, only by recognizing these opportunity costs that the 
cost analysis can present a complete and truthful account 
of cost as it actually is and as it actually functions in the 
determination of supply. But the same vice of atteippting 

If you'd know why 

That land is high, 

Consider this : its price is big 

Because it pays 

Thereon to raise 

The costly corn, the high-priced pig 1 '* 



SIGNIFICANCE OF COST OF PRODUCTION 109 

to explain one price as product by another price as cost 
attends opportunity cost that attends other costs. If 
opportunity costs are in any respect better than the other 
costs, it is not in being less superficial, but only in being less 
obtrusively so : the other costs appear to derive their prices 
from the very products the prices of which they purport 
to have determined ; opportunity costs, however, derive 
their price standing from alternative possible price products 
which, as displaced, never became actual. But either sort 
of cost, as an explanation of price, is an attempt to explain 
particular prices by other prices. 

Why cost is important. — But that this entrepreneur 
computation of costs is plainly superficial is no denial of 
its actuality or of its supreme importance as an intermediate 
step in the great value problem. The very fact that all 
the underlying and determining influences focus in the cost 
computation is alone sufficient to establish this./ We live 
in a society organized under competitive entrepreneur 
production. Modifications in the relative supplies of goods 
come about through the working out by the entrepreneurs 
of their individual cost computations. The whole process 
is captained by them. All of its forces and determinants 
manifest their influence and obtain their expression in terms 
of the cost computations of the entrepreneurs. Are rents 
for certain lands high? The entrepreneur has found it 
worth his while to bid thus high for these lands because, 
being scarce, their products sell high. The ultimate explana- 
tion for the prices is not with the entrepreneur but with 
the supply of land and of other factors of production, as 
over against the desire for land products and for other prod- 
ucts. iThus the point of view from which to attack this 
problem of causes is the entrepreneur point of view, pre- 
cisely because here the problem is presented in terms of the 
results which the ultimate causes have worked and of the 
conditions which these ultimate causes have established. 
We study the causes of price from the entrepreneur point 
of view, simply because it is through the entrepreneur pro- 
cess that the ultimate causes are forced to obtain expression 
in a competitive society. I Science is doubtless more than 



no THE ECONOMICS OF ENTERPRISE 

a mere description — generalized so as to be manageable — 
of the way in which things happen ; but thus much at least 
it must be. In addition, there is need that its generaliza- 
tions run in terms of the causal sequences involved. By 
the test of either requirement, we must study an entre- 
preneur economics in terms of the entrepreneur process. 

Cost is pivotal in competitive production. — In no field 
of economic activity, and therefore in no field of economic 
analysis, are we ever far removed from this entrepreneur 
process of the adjustment of production and of prices. It 
is, as we have seen, through the entrepreneur computation 
of costs that supplies are flexible in the market and therefore 
come to be adjusted against the demand. It is, in fact, the 
entrepreneur who furnishes the demand for all intermediate 
goods — the raw materials and the instruments of production 
— the things which are called production goods as distin- 
guished from consumption goods. The entrepreneurs are 
the bidders for the labor and the payers of the wages. It is 
by the competition of the entrepreneurs of each industry 
with the other entrepreneurs of that same industry, and of 
the competition of the entrepreneurs of each industry with 
those of other industries, that wages in particular and wages 
in general find a level. So the rates of interest on capital 
funds, and the rents of lands and of other productive equip- 
ment, are adjusted mostly or entirely through entrepreneur 
bidding. The various incomes apportioned under entre- 
preneur bidding to the various production goods rank by 
that very fact as items of cost in the process of- placing 
goods upon the market. The entrepreneurs pay these vari- 
ous rents and hires because of the prices to be obtained for 
the products. It is in truth precisely this entrepreneur 
point of view which gives to the market prices of products 
this appearance of being the causes of the prices of the 
productive factors in the computation of costs. And it is 
equally this same entrepreneur point of view which makes 
the prices of these productive factors appear to be the causes 
of the prices of the products. 

It is, therefore, precisely at this point that it becomes neces- 
sary to explain the price costs without any attempt to de- 



SIGNIFICANCE OF COST OF PRODUCTION 111 

duce these from the prices of their products, and to explain 
the prices of the products without deducing these from their 
price-costs. It is the particularistic and individualistic 
nature of the entrepreneur's activities and computations 
that explains his ambiguous formulations of causation and 
his perplexing circuities of logic. But somehow, none the 
less, the problem must be seen in the large and as a whole, 
and yet not inconsistently with the particularistic process. 
Otherwise the logic must always be Janus-faced. The funda- 
mentals of the problem must be articulated with the process 
as it actually takes place. 

The causes that underlie costs. — It is in this aspect 
that our earlier study of the organism and of the environ- 
ment offers its especial service. Man as consumer is the 
end of the economic process, its purpose and its justification. 
His wants are, therefore, fundamental in the case. But he 
is not merely the end ; as producer he is also means to the 
end. 

Therefore, over against the human need for goods, there 
is to be set the human being as producer together with his 
external equipment of auxiliaries (instrumental and interme- 
diate goods). Taking for the time being his needs for 
granted, the relative prices of different goods must trace 
back to the relative scarcity of the economic ability to pro- 
duce them, or to the relative scarcity of the appropriate 
equipment, or to both in conjunction. The causal sequence 
on the supply side of the problem runs from the relative 
scarcity of the factor to the relative scarcity of its product, 
thence to the relatively high price of the product, thence to 
the relatively high remuneration of the factor. 

The cause of the market price of the product is, therefore, 
on the supply side, not the high rewards of the contributing 
factors but the scarcity of them, which scarcity explains the 
scarcity of the product. It is this relative scarcity of the 
factors that ultimately explains their relative positions as 
costs. But the hire of any factor as cost gets its immediate 
explanation not directly from the scarcity of the product 
but, as an entrepreneur computation, from the price of that 
product, which price is in turn due to the scarcity. Each 



112 THE ECONOMICS OF ENTERPRISE 

individual entrepreneur, in his private search for private 
gain, schemes and contrives and adjusts within this large 
general situation ; is mostly determined by it ; and finds no 
ultimate cause for anything ; and needs look for none. His 
motive for the hiring of factors is to place upon the market 
a price product. The limitations upon his individual prod- 
uct are set by the prices imposed upon him for the necessary 
factors. The whole price situation presents itself to him as 
causal of his costs and as set over against the demand prices 
which customers will consent to pay for his particular prod- 
uct. He stands merely as an intermediary in the case, repre- 
senting, in his hiring or buying of productive factors, the 
demand of the purchasing public, and representing, in his 
cost computations, the degree of scarcity of the productive 
factors relative to the demand for their products. Thus on 
neither side is he the ultimate cause. He is merely an agent 
directing the process through which an adjustment is reached 
among all the influences focusing upon him — on the one 
side, all the different desires for goods as they are represented 
and expressed in price offers; on the other side, (1) the 
aggregate human productive ability for his purpose, (2) 
the aggregate intermediate equipment. We say that he is 
merely a result and not a cause. Yet clearly enough, as 
one item of human productive power, he is in so far a part 
of the total cause. Through his choices and his changes 
of productive activity he reacts upon the great situation 
that he faces and is, therefore, in some degree a cause to 
modify it. It is by entrepreneur bidding that the factors 
of production receive their prices and change their prices. 
This bidding is done and the prices are paid in view of the 
marketable product which is in prospect. Thus the expected 
product is at once the purpose of the bids, the justification 
for them, and the limit upon them. The joint product of 
the cooperating factors is a price fund to be divided among 
them. It is, then, by the process of entrepreneur bidding 
that this division of the joint price product — the distribu- 
tion of it — is made among the different claimants to it. 
The prices upon the factors are the costs of their product — 
a product which is significant as product only by virtue of 



SIGNIFICANCE OF COST OF PRODUCTION 113 

its price and in the degree of its price. The product is a 
price item and the factors are price items. The prices paid 
for the factors are, then, distributive shares out of the prod- 
uct derived from them. And since the costs are price items 
and the products price items, it is evident that the problem 
of the prices of the products and the problem of the price 
shares distributed out of the products — the costs — are 
merely different aspects of the one great and inclusive prob- 
lem of market price. 

The moving equilibrium. — The truth is that the vice of 
circuity is everywhere difficult to avoid in reasoning upon 
the problem of price. Prices have their setting in a great 
moving equilibrium, all the parts of which are related to 
all the other parts, and are in close interdependence with 
them. As one part changes, others and then still others 
change. The lines of causation are not easy to trace or 
even the direction of them easy to establish. Almost any- 
thing may plausibly appear as the cause or the result 
of almost anything else. Where, if anywhere, are the 
ultimate determinants? Is there, indeed, casually or logi- 
cally, either beginning or end to be discovered? We start 
with the entirely correct assumption that the market price 
of any one commodity is determined by the demand for it 
and the supply of it, and that this price is the equating point 
between the demand and the supply. But note that this way 
of formulating the price problem concerns itself with only 
one commodity at a time. Prices are tacitly taken for 
granted as already fixed for all other lines of production. 
Thereupon certain maximum paying dispositions are as- 
cribed to the respective individuals demanding the com- 
modity in question. But why these maxima? Why does 
a particular individual limit his payment to say $10 ? It is 
precisely that to this $10 there already attaches a purchasing 
power over other things. That a purchaser is marginal at 
$10 means that at any price above $10 for the article under 
consideration he would rather buy something else. Our 
analysis of the forces determinative of the demand side of 
any one price equation proceeds, therefore, upon the assump- 



114 THE ECONOMICS OF ENTERPRISE 

tion of an existing medium of exchange and of an established 
general price situation, — assumes, that is" to say, an existing 
system of prices upon goods in general and an established 
price relation for these goods in terms of money. And were 
there no money in the case, were trading confined to barter, 
a decision to pay not more than 10 sheep for one horse must 
be arrived at in view of what the sheep would buy of other 
things than horses. 

Or consider this same difficulty in another aspect : Money 
comes to be offered for any given commodity, say hats, by virtue 
of the fact that possessors of other commodities have changed these 
over into money to be used as purchasing power. 

These other commodities are of indefinitely various sorts. The 
money demand for hats sums up, therefore, countless different 
dispositions to barter different commodities for hats. In each 
case of the exchange of these other goods into the money with which 
to buy hats, the desirability of the trade depends upon the amount 
of money that these other goods can be changed over into. The 
money demand for hats can, then, only schematically be set apart 
from the money price of other things. 

The supply aspect of the moving equilibrium. — Similar 
difficulties present themselves upon the other side, the sup- 
ply side, of the market equation. The disposition of a seller 
to insist upon a certain price expresses merely the fact that at 
less than this price he would prefer the thing in hand to anything 
else that the money would buy. Other exchange relations, an 
established system of prices for other commodities, are really in- 
volved in the fixation of the price at which any one commodity 
will be offered for sale by any individual. 

Cost of production likewise, as lying behind the reservation 
price of any seller, points commonly and mainly to the price pro- 
ductiveness open to the entrepreneur in other fines of production : 
the farmer, for example, must have a certain price per bushel for 
his wheat, else he will produce corn or hay or wool. The cost 
of producing one price fact must commonly afford an indemnity 
for not producing an alternative price fact. The supply of any 
commodity is, therefore, inseparably connected with the prices 
of all other producible goods, precisely as the paying disposition 
for any particular line of goods is inseparably connected with the 
paying dispositions for all alternative goods. 



SIGNIFICANCE OF COST OF PRODUCTION 115 

What, then, can be done ? — If both the demand concept and 
the supply concept are vahd to explain a particular market price 
only upon the assumption of an otherwise complete and adjusted 
price situation; if the usual interpretations of cost are incom- 
plete, and superficial; and if any amended doctrine of cost can 
be better only in being made exhaustive and actual, but must be 
equally open to the charge of superficiality or circuity, — where 
shall be found an explanation causally ultimate and logically 
adequate ? 

It is still necessary to explain things in harmony with the actual 
process in which they take place : our explanations must be formu- 
lated consistently with the existing entrepreneur on-going of things, 
and at the same time must be formulated in terms of the causes 
which determine and direct this actual on-going. We are not to 
rest satisfied with the fact that, for example, the rent is high or 
low or the wage outlay this or that ; we must go farther than the 
entrepreneur goes in explaining what the entrepreneur does. We 
must, that is to say, appeal to the human wants which, in terms 
of price-demand, are making call upon the productive powers, 
human or environmental, which the entrepreneur employs for 
hire. On the cost side of the case, not the rents paid for land, 
but the lands available for supplying product, are the explanation 
of this supply and of its price. So with wage costs : it is the labor 
supply and not the wages which are fundamental in the situation. 
In coUectivistic production the problem would present essentially 
the same determinative influences but the process would be another. 
In the present price system, the process is the entrepreneur process. 
It is the entrepreneurs whose gain-making activities furnish the 
guidance and the direction under which the underlying conditions 
and causes reach_e2fgression. It is the entrepreneurs who dis- 
tribute the productive agents and instruments into their different 
channels in response to the pressure of human needs as expressed 
in competing price demands. It is through the bidding of compet- 
ing entrepreneurs that prices are attached to the materials that 
enter into the productive process, and that the various hires accrue 
to the various productive factors. But the fundamental facts 
that face the entrepreneurs, the conditions within which they work, 
the energies that they supervise, the forces that they adjust into_ 
a market equilibrium, are the ultimate situation facts — on the 
demand side, human needs, on the supply side, productive equip- 
ment and productive ability. In the cost computations of the 
entrepreneurs we are studying the case in the form of the actual 
process i^ which the thing takes place. There is nothing further 



116 THE ECONOMICS OF ENTERPRISE 

possible here in the way of explanation than fully and accurately 
to describe the process. 

But each factor conditions every other ; the process is something 
larger in its reach than the activity of any individual entrepreneur ; 
it is each entrepreneur m face of all the others, and all together 
in face of the general situation of needs and equipment and human 
productive power. Out of this total situation, of which the entre- 
preneurs make a part, and over which at the same time they are 
the supervisors and directors, there emerges the resultant price 
adjustment. To the individual entrepreneur, not merely these 
underlying and determining facts, but the market adjustment flowing 
from these facts, stand as definitive data which he is powerless to 
change and to which he must make such gainful adjustment for 
himself as he may. But none the less it is to these entrepre- 
neurs as an aggregate that this market adjustment is due, — 
the underlying situation being taken as assumed. \ Collectively 
they are the cause of an adjustment which appears as directive 
and controlling for each individual entrepreneur in the process. 
But each of these individuals helps in turn to bring about this 
aggregate adjustment. Thus the activity of each appears to be 
a derivative of that which each in his own small share has con- 
tributed to establish. If there is confusion in thinking of any par- 
ticular fact as at the same time mostly effect but partly cause, let 
one again imagine himself as jumping, the last person, upon a 
crowded raft and sinking with it. Does he sink the others or 
do they sink him ? j So the entrepreneur is a director and super- 
visor. But in part he creates the situation which he directs and 
supervises. 

We have seen that cost of production is the entrepreneur's 
method of computing in terms of price the total resistance to 
production — of arriving at the price which he must receive 
if he produces ; that this computation may apply to an item 
of product at his margin of production or to any volume of 
his product as a whole ; that he has small concern with the 
pains or burdens or sacrifices of his employees otherwise than 
as these may influence his outlays in wages ; that such of the 
outlays as attach to the use of the bounties of nature can have 
no pain cost behind them ; that much even of the labor which 
the entrepreneur employs is not painful to those who perform 
it, and that the pay of the different laborers bears no propor- 
tion to the painfulness of the tasks which they perform ; and 
that therefore cost of production as entrepreneur money cost 



SIGNIFICANCE OF COST OF PRODUCTION 117 

is incapable of direct or indirect reduction to any possible 
denominator of pain. 

And further : it is clear that the money costs to the entre- 
preneur are partly due to the attractiveness of alternative 
opportunities for gain ; that therefore no cost of production 
doctrine is adequate or accurate which does not take account 
of competing opportunities as costs ; and that such costs as 
attach to the equipn^nt goods owned by the entrepreneur 
are mere foregone opportunities, an|i lack any possible refer- 
ence to pain. 

But it has also been made clear that, even with demand 
taken for granted, entrepreneur cost of production cannot 
stand as an ultimate explanation of price. Offered as such 
explanation it is, indeed, both circuitous and superficial ; it 
purports to explain some prices by other prices — the price 
of the product by the prices of the costs. If the pain cost 
theory, in its attempt to arrive at an ultimate explanation, 
avoids superficiality through committing itself to sheer error, 
entrepreneur cost does even worse ; it avoids error by stop- 
ping at superficiality or even circuity. Nor is it entirely 
consistent in its circuity; for it alternates between regard- 
ing the price of the product as dependent upon what, as 
costs, the different factors are paid, and regarding what the 
different factors are paid as dependent upon the price of the 
product. 

The same circuity vitiates also the distributive aspects of 
the price problem, precisely because the distributive shares 
are mostly the same sums that the entrepreneur computes 
as his costs ; distributive shares to the recipients are costs to 
the entrepreneur. Thus, either the price of the product or 
the prices of the costs (these costs being mere distributed 
fractions of the product) jnust remain unexplained. 

If, however, there is any escape from this circuity, it is 
solely for the economist to seek it. The cost of production 
computation, however neglectful of ultimate bases and ex- 
planations, is entirely adequate for all the purposes of the 
entrepreneur. It is no business of his to explain either the 
necessity of his outlays or the prices of his products, but only 
to arrive at the largest possible net gain from his efforts and 
his investment. But the economist's problem is quite dis- 
tinct ; he must really explain ; and part of his difficulty is in 
the fact that his explanations must be sought within the actual 
situation and must run in consistency with the actual entre- 



118 THE ECONOMICS OF ENTERPRISE 

preneur process. He must accept the entrepreneur function 
and the entrepreneur analysis ; but he must carry the analy- 
sis further than the entrepreneur is concerned to carry it 
in explaining what the entrepreneur does, — the situation 
conditioning his activity, the forces playing upon it, and the 
results that flow from it. Thus the economist must recognize 
that both the prices of the products and the prices of the 
bases of the product are equally results»of the underlying and 
determining conditions ;» that neither does cost ultimately 
fix price nor price ultimately fix cost ; that the outlays which 
the entrepreneur makes, the scarcity of the products which he 
produces, and the prices at which he must sell these products, 
are equally the results of the limited supply of the productive 
factors which he employs ; and thus that, with the demand 
for the products taken for granted, the causal sequence on the 
supply side of the problem runs from the relative scarcity 
of the factors to the relative scarcity of the products, thence 
to the relative prices of the products, thence to the relative 
remunerations of the factors. These remunerations are 
forthwith to be recognized as distributive shares. 

It thus appears that costs to the entrepreneur are merely 
the guise in which, in an entrepreneur economy, the under- 
lying and controlling situation of human needs on the side of 
demand, and of productive ability and productive equip- 
ment on the side of supply, present themselves to the entre- 
preneur and bear upon him in his process of placing a particu- 
lar product upon the market. Costs are merely one point or 
aspect — but the central point or aspect — in the process of 
production and distribution in the competitive regime. 

The following chapter will be devoted to an analysis of the 
meaning of the terms producer axid^'productive in the competi- 
tive economy, and will show that the point of view from 
which production and productivity must be interpreted is the 
private and individual point of view; that all labor and all 
instruments of production are hired and paid for by in- 
dividuals that want them, and are wanted for their service 
to individual gain ; that anything that aids the user in his 
quest for gain is productive to him ; that the effect upon 
others or upon the general welfare is not to the purposes of 
the quest, and therefore is not relevant to the meaning of the 
term ; that in neither the materiality of the source of the 
service to the individual nor in the materiality of the result 



SIGNIFICANCE OF COST OF PRODUCTION 119 

is the test of capital or of productivity to be found ; that any 
possession that brings gain to its possessor is capital, and that 
any result that commands a price is product ; in short, that 
productivity in the competitive order means merely service- 
ability for private income or private gain — means proceeds. 



CHAPTER IX 

WHAT IS PRODUCTION? WHAT THINGS ARE PRODUCTIVE? 

The variety of productive activities. — We have already 
noted the wide variety and complexity in the desires of 
men and in the labor and equipment employed in satisfying 
these desires. Some labor is applied to obtaining wheat 
or meat or vegetables for human food, — other labor in the 
different departments of the clothing industry, still other 
in the making of textiles for tents and awnings, other again 
in constructing those larger suits of clothing which we call 
houses. And there are tables, chairs, pictures, books, wagons, 
cars, locomotives, automobiles — a countless variety of com- 
modities upon the market in the form of tangible material 
products. And there are immaterial products ; if foods 
and medicines to make us strong and well are the result of 
productive enterprise, what shall be said of the wise advisings 
by which the physician directs us toward the same goal of 
health. If his pills are products worth paying for, his advice 
is still better worth — a more valuable product. To 
regard the maker of a violin as productive occasions no diffi- 
culty; as little should any one hesitate in pronouncing pro- 
ductive the employee who plays the violin. If the manu- 
facturer of a book is productive, so also is the writer of it. 
And if the writing of an essay is productive, so also is the 
effort of the lecturer who does no writing. And if a painting 
is a product, so also is the vitascope picture upon the canvas 
or the living pictures which actors present upon the stage. 
And by the same test teachers and preachers and singers 
are productive. Likewise the railroad that transports the 
goods, or the retail merchant around the corner who makes 
them accessible, is as much a producer as the farmer that 
grew them. 

120 



WHAT IS PRODUCTION? 121 

The nature of competitive production. — Economic pro- 
duction is the bringing about of changes appropriate to com- 
mand a price ; it is the response to price-paying disposition. 
Anything that meets this test is economic production. And 
nothing else is. 

But no economic activity is able to command a price merely 
by the fact that the result is useful. Not only must the re- 
sult have utility, it must also be scarce, else, not having to 
pay for it in order to get it, no one will pay for it ; it will com- 
mand no price. 

Thus the test of productivity is not in the materiality of the 
product. To produce is not to create. The production of borax 
requires merely a 20-mule team to cliange the location of the thing 
from a place where, satisfying no need, nobody will pay for it, to 
a place where there is a disposition to pay. So, to produce coal 
is in part to change its form, and more to change its place. The 
production of ice is mostly the keeping of it from winter to summer, 
a time utility. A statue is merely form utility. In truth, so far 
as we know, neither matter nor force can be created or destroyed ; 
the law of the conservation of energy appears to be of universal 
validity. Decay, combustion, and digestion are the mere breaking 
apart of matter, the taking on of a less complex organization, the 
undergoing of new distributions. Mechanical energy may be 
changed to heat, heat to light or to electricity, heat or electricity 
back to mechanical energy, but the equivalence is constant if all 
wastes and leaks are allowed for. 

And there is really a more serious difficulty for those economists 
who regard the materiality or tangibility of the results achieved 
as the test of productivity. It was pointed out in our analysis 
of utility that the so-called qualities inhere not in the objective 
fact but only in the relation of that objective fact to the human 
being; that what we see or feel or taste or hear gives no trust- 
worthy account as to what the outside world really and ultimately 
is or is not, but only as to how it affects us. It follows that we have 
as little warrant as necessity for asserting the materiality of any 
part of the outside world, in such a sense as to distinguish it from 
the world of force or energy. In truth, all that we know of the 
external fact that we call matter, we know solely in terms of the 
forces with which it affects us — in resisting the pressure of touch, 
deflecting rays of light to us, drum-beating upon our apparatus 
for hearing. Extension is only resistance over a given area, density 



122 THE ECONOMICS OF ENTERPRISE 

is only degree of resistance, weight only pressure downwards, 
taste only a chemical reaction. For what we know — and as later 
science inclines to infer — ■ matter may be nothing more than 
the manifestation of force — the ultimate elements of the atom 
mere points of electrical energy. At all events, we know matter 
only as manifestation of some form or forms of energy. The 
issue does not fundamentally signify for our economic reasonings. 

It follows that to measure wealth in any degree in terms of ma- 
terial existence is misleading. There is no more matter in the world 
at present than there was a thousand years ago; but matter has 
been modified so as better to answer human needs. The house 
which was mere clay or stone, the cloth the material for which was 
not grown but was in the earth or the air, are now wealth to man- 
kind. Work produces no new matter, no new forces; it does 
change the applicability of matter and force to human uses. 
The iron in the earth mined, melted, freed from impurities, ham- 
mered and fashioned, forms a pocket knife. Nothing has been 
added to the matter of the earth ; something has been added to the 
wealth of men. 

Thus, as human needs, desires, and knowledge expand, there 
is, by that very fact, room for an increase in wealth. " Of the 
one hundred and forty thousand species of vegetable life we find 
only three hundred of sufficient value to cultivate ; and of the 
thousands of species in the animal kingdom we make use of but 
about two hundred." (De Candolle.) 

Goods increase, therefore, along two lines : (1) by changes 
which man impresses upon the outside world in making 
it more fit for his uses ; (2) by changes in man himself 
— in strength, in knowledge, in desires — by which he be- 
comes better able to make use of the outside world. Pianos 
could not be wealth in a society lacking musical tastes, or 
books wealth to savages. That a mineral becomes wealth 
presupposes a human use to which it may be put, an ability 
to mine the mineral, and a knowledge to adapt it to use. 
It is this capacity for service, this attribute of utility, which 
marks all objects of desire and brings them within the broad - 
classification called goods. 

Services are products. — There are, however, goods which 
are commonly termed not wealth but services. A book, 
or a sheet of music, or a piano, is wealth. All afford pleasure 
or advantage. They may be preserved, handled, possessed. 



WHAT IS PRODUCTION? 123 

That is to say, they are fixed and embodied in matter. 
But we are equally and as truly served by the advice of the 
physician, by the efforts of the singer or the actor, by ora- 
tors, preachers, and teachers. These goods, which are 
termed by the economists services, are very important facts 
in life, and furnish the occasion for a large share of our ex- 
penditures. On the street car or the railroad we pay for 
being carried. The policeman, the judge, and the lawyer 
supply us, in security, direction, and advice, with things, we 
acutely need. From household servants we purchase at- 
tention, care, and attendance. In truth, it is sometimes 
hard to draw the line between services and commodities. 
We eat the broiling of our steak as truly as our steak. Thus 
the performance of a service must be accounted an act of 
production, since it is the creation of valuable utility. Ulti- 
mately, indeed, all commodities are such by the services which 
they finally render — their psychic effects. 

For the purpose of the inquiry as to what sorts of labor con- 
tribute to increase the aggregate accumulated wealth of society, 
an inquiry with which the earlier economists were much concerned, 
there is importance attaching to the classical distinction between 
so-called productive and so-called unproductive labor. Services 
are in their very nature evanescent ; they will not store ; in coming 
to be they cease to be ; they do not add to the stock. On the other 
hand, that which is material is in a general way enduring. Thus 
only material things appear to add to wealth. But the line of 
distinction which was really sought was not that between the 
productive and the non-productive, or between the material and 
the immaterial, or between the tangible and the intangible, but 
between the accumulatable and the non-accumulatable. The 
line, however, between the material and the immaterial applies 
not badly for the purposes of the desired distinction. Some forms 
of material product are, it is true, very temporary in their existence ; 
e.g. ice cream; but, nevertheless, the distinction as made draws 
the line fairly accurately between the things that add to accumu- 
latable wealth and those that do not add. The terms productive 
and unproductive were, however, not well adapted to the purposes 
of the distinction. Nor does the distinction mean much from the 
point of view of the modern competitive analysis and of its theo- 
retical needs. 



124 THE ECONOMICS OF ENTERPRISE 

The producer is not product. — Productive, then, we call 
whatever labor achieves a gain for the laborer whether its 
results be a valuable commodity or a valuable service. But 
here another difficulty presents itself: doubtless food or 
medicine is wealth; but is the derived health or strength 
wealth? Accurately speaking, can one's face be one's for- 
tune? Is one who is studying a trade or a profession yet 
a producer? If health is wealth, does it matter whether 
one is born with it or had to acquire it ? Are one's muscles 
a part of his wealth? One's digestive apparatus? The 
distinction must be again drawn between those things in 
the outside world which are gainful to man and those 
things which, in the last analysis, are a part of man himself. 
Bread, for example, is clearly enough an outside good, an 
external thing commanding a price. How after it is eaten? 
We say that it has been consumed. It no longer exists as 
bread. Its services have been rendered in maintenance of 
life or increase of strength. But how shall we regard this 
result, this strength? In the primary division of economic 
facts into man and environment, does bread fall into one 
classification and strength into another? The thing was 
bread ; it is now life or strength. Is it now something pos- 
sessed by man, or is it a part of man himself? Is it subject 
or object, possessor or possession, man or environment? 

Man is the beginning and the end of productive effort. 
The creation of utility is purposed by him for his consump- 
tion. He puts forth effort that he may enjoy its rewards. 
The economic cycle begins and ends in him. He works that 
he may live. He is the producer and not the thing produced. 
The more strength the better producer — later the larger 
product ; but the strength is not product. So the mixtures 
prepared by the chemist, and the doctor's compoundings 
of medicinal gums, fall within the class goods, while my 
good health to resist contagion and your good sense to avoid 
it are ranked as human attributes. 

Only objective facts can be wealth or product. — But while 
the knowledge which avoids disease is a human attribute 
and is not wealth, the outside fact from which this knowl- 
edge is obtained, the book, or the advice of the physician, 



WHAT IS PRODUCTION? 



125 



is either wealth or service. The mental power of the physi- 
cian, his knowledge, however, is not wealth ; it is the source 
of his ability to do a useful thing, to speak a word or write a 
prescription which shall be of advantage to another human 
being. This knowledge is a part of the physician's equip- 
ment for the production of utility. When this equipment 
shall come to service the result will be a good. As equipment, 
however, it is not utility or good, but physician. 

The terminology and the distinctions so far given are con- 
cisely summarized in the following : 



Facts 



' Internal 



. External 



Useless to 
possessor 

Useful to 
possessor 
(goods) 



Plenty 

(valueless) 
Scarce 

(valuable) 



Services 
Wealth 
(property) 



But one or two ambiguities should be noted. The term 
services is used to indicate either the valuable result of the 
labor or the labor itself. But obviously, by this test of re- 
sults, all material goods finally render services. The term 
wealth, on the other hand, is sometimes said to apply only 
to material things of value. A franchise, however, or a 
patent right is wealth by the fact that it is an objective 
thing, a possession ; wealth, therefore, means in essence 
valuable possessions, whether material or immaterial. 

Materiality unimportant. — But to return to the pro- 
ductivity of labor : we have seen that all work in the pro- 
duction of valuable goods, material or immaterial, wealth 
or services, is productive so long as the result is something 
of value objective to the workman. Thus the bookkeeper 
or designer or advising chemist in the factory must be de- 
clared productive ; or the salesman in the warehouse ; or 
the traveling salesman upon the road ; or the writer of adver- 
tisements. Each has a separate share, a share worth pay- 
ing for, in getting saleable commodities upon the market. 
All are cogs in the machine, steps in the process contributory 



126 THE ECONOMICS OF ENTERPRISE 

to the great end in view, — namely, the production of some- 
thing that some one is willing to pay for. If we are to regard 
as productive the industry which furnishes the cattle, so 
must we also the industry that cooks the beef. If to grow 
wheat or to grind it is productive, so also is the baking. If 
the stock car is productive in transporting beeves or grain 
over wide intervals of space, so also must be the waiter who 
brings the food from the kitchen or passes it at the table. 
If we pay to have commodities transported, so we pay to 
have ourselves transported. The rule which holds for the 
tailor who cuts the goods or for the laborer that pieces 
the goods together, is valid also to declare productive 
the presser who shapes or the valet who brushes. We 
wear the making or the brushing of the coat as truly as 
we wear the cloth of it. She who wields the broom in the 
house is no less productive than he who fashions the 
broom in the factory. One colorist with his brush 
pictures his fancies upon canvas ; another color-worker 
by the magic of his words paints pictures upon the tablets 
of the mind ; the fact that we pay for either shows either 
to be value rendering. 

Ethical tests irrelevant. — Nor, again, does it at all matter 
to the purpose what may be the artistic merit of the service 
or its moral quality — whether the advice be wholesome, 
the acting skillful, the music classic, the play clean, the 
teaching scholarly, the lecture conservative, the preaching 
godly. Each of these questions is irrelevant except in so 
far as it may have some bearing upon the price that will be 
bid. Peruna, Hop Bitters, obscene literature, indecent 
paintings, picture hats and corsets are wealth, irrespective 
of any ethical or conventional test to which they may or 
may not conform. Being marketable, price-bearing, they 
are wealth. So likewise of services ; in no case is economic 
productivity a matter of piety or of merit or of social deserv- 
ing. Were it otherwise, it would be necessary to change 
one's political economy according as one were talking to a 
prohibitionist or to a German. What is the economist, 
that he should go behind the market fact and set up a social 
philosophy of ultimate appraisals ; " For who knoweth 



WHAT IS PRODUCTION? 127 

what is good for a man in this life, all the days of his vain 
life that he spendeth as a shadow? " If the generous fees 
that the lawyer receives for pleading an unjust cause are 
earned, so also is the daily intake of the beggar at the corner, 
or of the holdup man in the alley.*' Always and everywhere 
in the competitive regime the test of competitive production 
is competitive gain — proceeds. Whatever effort serves 
the acquisitive end is labor. Profits are merely one form of 
individual pecuniary return for personal pecuniary activity. 
Speculators, lobbyists, quacks, painters, abortionists, and 
prostitutes are producers : that they are paid is the adequate 
and ultimate proof. This is surely not to deny the fact of 
parasitism in society. But parasitism is not a competitive 
category but an ethical appraisal. In the economic sense, 
productivity in a competitive society — the proceeds con- 
cept — is a concept unrelated to ethical criteria and uncon- 
cerned with any social accountancy. Grass-cutting or 
sheep-shearing on the farm or the range, slave-driving on 
the plantation, slave-catching in the jungle, sweat-shop 
exploitation by the contractor, white-slave exploitation by 
the procurer, tress-cutting from peasant heads by the hair 
merchant, pocket-picking by its professors, adulteration 
by the manufacturing druggist, poison-canning by the pack- 
ers, shell-gaming by the gamblers, privilege-manipulating 
by the monopolist — are all productive occupations. 
Whether one, in his catholic wholeness shall include, like 
Francis of Assisi, the grass and the flowers as among the 
brotherhood that he may not exploit, or, with the vegetarians 
and the Humane Society, shall exclude from his exploitation 
only the higher levels of the brute creation, or shall extend 
his operations to the African, the Indian, and the Chinese, or, 
aiming still higher, shall subject to his purpose of gain his 
fellow-citizen, his neighbor, and finally, his mother, are 
purely moral questions, interesting to the arts of public 
policy and of legislation ; but gain remains gain however it 
be achieved ; and competitive productivity includes it all. 

So again productive effort is often exerted in producing goods 
for the consumption of the producer himself. It is thus evident 



128 THE ECONOMICS OF ENTERPRISE 

that labor is not to be declared productive or unproductive by the 
test of whether the product is actually sold, or even by the test of 
whether the producer could sell it, but rather by the test of its 
having a price significance. Its result must be not merely a utility 
but a valuable utility — something that the possessor would pay 
for if he had to — something that, produced by him or by another 
for him, will protect him from some outlay or sacrifice or burden. 

Put in terms of our earlier analysis the test of productivity is 
satisfied if either a reservation price or a demand price attaches 
to the good produced. 

Reservation prices. — And here we may stop to note another 
theoretical advantage in stressing the demand aspect of the reser- 
vation price ; we are able to regard all goods produced in society 
as goods actually upon the market. Total supply and total product 
become interchangeable terms. It often clarifies the argument 
to regard all employers of labor, middlemen or other, and all self- 
employed laborers, whether or no they sell their product, as entre- 
preneurs. In any case there is a price upon the product at which 
the owner would be willing to sell. If his price be above what he 
can sell it for, he retains the commodity under his own demand. 

What products affect the demand for labor. — It is sufficient 
for the present to note that all this demand for labor — the entre- 
preneur demand, the demand of the employing consumer, and even, 
also, the worker's demand for his own work — goes to make up 
the total price offer for labor. For such labor as the entrepreneur 
employs he pays wages at the rates which the market imposes ; 
and these wages, therefore, stand as cost items in the computing 
of his total cost of production. 

The role of wealth in affording income. — But there are 
obviously other productive facts than labor. There are, 
as we have seen, two ultimate sources of income, human 
activity and human possessions. To say that the individual 
derives his income from his labor or from his property does 
not, it is true, take due account of gifts and of gratuitous 
services of one sort or another — of which more later — but 
is, nevertheless, accurate in the main. We have now to 
examine the property sources of income. 

If working with machinery gave no larger product than 
the labor alone, it would not be worth while to buy or hire 
or construct the machinery. If the quality of the land had 



WHAT IS PRODUCTION? 129 

no effect upon the amount of crop that could be harvested, 
agricultural land could not command a rent or sell for a 
price. Instruments of production are productive in the 
same sense and by the same tests as apply to labor ; namely, ; 
according to the proceeds returned in the price of the prod- ' 
uct. And as before with the labor, so now with the instru- 
ments : it does not matter that the owner of the instruments 
may consume instead of selling the product. The instru- 
ments still have price significance to him, earning him in- 
come of valuable goods or saving him an outlay of cash. 

Clearly enough, then, the notion of productivity applies 
to all instruments of production, and to all equipment 
goods, as the command of rent or of price sufficiently proves. 
In the competitive sense, productivity really finds its sole 
test in price. But the class of possessions that return in- 
come includes a wide variety of property. Precisely as to 
help people to keep healthy is a productive fact, a service, 
so to furnish some one a home to live in, and to keep warm 
and strong in, is also a service, although attached, it is true, 
to the possession of a material good. There accrues not 
merely a money income to the owner of the house but also 
an income of service from the house to the tenant. It is, 
indeed, on account of this service to the tenant that the 
tenant renders a money income to the owner. The books 
of a circulating library command a hire for the same reason 
that the lecturer or the teacher or the preacher receives 
a wage. The rent of talking machines has the same basis 
as the salary of its human competitor. The passenger coach 
and the brakeman are each engaged in furnishing transporta- 
tion. The Pullman in America is for essentially the same 
service as the cooley carrier in India. The theater building 
or the concert garden are purveyors of the same sort of ser- 
vice as the actor or the musician. The picture upon the 
wall gives a continuous reproduction of the tableau vivant. 
In some homes electrical appliances displace the furnace or 
the stove ; or one may warm himself through the kneading 
or the rubbing of the masseur. In truth all wealth is such 
by the fact of rendering scarce services, and all forms of 
wealth receive their hire or price by virtue of this power of 

E 



130 THE ECONOMICS OF ENTERPRISE 

service. A durable good is merely the material base of a 
series of services. Thus a money income from property 
may be derived from lending houses, pleasure boats, mas- 
querade costumes, horses, automobiles, picture films, paint- 
ings. This money income to the owner is the reflection and 
the proof of the fact that the property renders an income of 
valuable service to the user. This use is generally paid for 
according to the time for which the property is lent out; 
and this is because the services accrue with passing time ; 
that is, they arrive in a time series. The time rent paid by 
the borrower is the expression of the fact that with passing 
time a product accrues from the borrowed thing. The rent 
received by the owner is in turn the productiveness of the 
thing to him. All durable goods illustrate this character- 
istic of rendering services with passing time. These services 
are, therefore, the time incomes of property. 

But precisely as it was shown that products need not be salutary 
or wholesome as socially viewed in order to be wealth, so the durable 
goods that earn income for their owners need not be things of which 
the ethical sense of most men would approve. As one may collect 
rents upon blacking boxes lent to street boys or from hurdy-gurdies 
hired by Italian street wanderers, so one may rent out finery to 
deck the vagabondage of women, or may, for hire, supply safe- 
cracking appliances to men disposed to ply the burglar's trade. 
Burglars' jimmies are wealth by the very fact of the marketable 
services that they afford, their proceeds. The rent expresses the 
fact that the services are marketable. The property earns income 
to the owner : it is, therefore, productive. Saloon appliances, and 
the dice and the roulette table of the gambler, are all productive 
for the purposes of the problem, the earning of an income. Pro- 
ductive really means, then, gainful or acquisitive : meaning only 
this, but impljang something dangerously more, it would be a 
good word to beware of. 

Are thieves producers ? — But the critical reader may well have 
protested when, a short time since, the beggar, the gambler, and the 
thief were included among " productive " laborers. The writers 
of salacious books and the printers of indecent pictures may readily 
be regarded as productive after their kind, since their goods find 
willing buyers. And even the men who delude the people into 
paying for adulterated foods and drugs, or for shoddy clothes or 



WHAT IS PRODUCTION f 131 

trash remedies, or even for poisonous nostrums, may be called 
productive, since they persuade us unwisely to want the things 
and to pay for them. Perhaps even the gambler and the beggar 
must be included. But does the same thing follow for the thief, 
the burglar, and the holdup man? They neither give us anything 
for our money nor ask our consent to the transfer which they bring 
about. On this basis surely a distinction might be drawn. If, 
however, the distinction be accepted as vahd, it must be on terms 
of denying that many commodities that sell and that bear rents — ■ 
burglars' jimmies, for example — are wealth; for if the burglar's 
outfit is wealth by the service it renders and by the rent that it 
commands, so, also, must the burglar's efforts be admitted to be 
productive for him and for his private purpose. They achieve 
proceeds. Private purposes are the purposes according to which 
competitive activities must be tested. It would be a strange 
classification which should include as " productive " property 
the kettle in which Peruna is brewed and the coils in which whisky 
is distilled, the roulette table of the gambler, the trade tatters of 
the professional beggar, and the retorts of the adulterating druggist, 
but which should yet at the same time declare neither wealth nor 
productive the jimmy of the burglar, the sandbag of the thief, the 
ship of the slaver, and the brig of the pirate. AH absorb capital 
in purchasing them. 

Intangible properties give products. — Nor is the test of 
the productivity of property to be found in the materiality 
of the thing that is owned. The individual derives income 
from personal notes as well as from other investments. Prac- 
tically all of the assets of a banking or of a trust company 
are credit items. So patent rights are sources of incomes and 
hence command a price upon the market. The toll bridge and 
the toll pike are income earning properties mostly by the legal 
rights which they enjoy: nor do they take the trouble to 
ask one's consent to their exactions. So franchises, and 
good will, and advertising popularity, are important property 
rights attainable by investment, justifying investment by their 
return, and commanding a price in the investment market. 
Money and bank credits — and the credits equally with the 
money — are income-earning properties to the owner. 

Whether incomes imply hiring or tenancy. — Not all of 

these different sorts of property is the entrepreneur likely 



132 THE ECONOMICS OF ENTERPRISE 

to need to hire at a time charge or to buy outright. Prob- 
ably the larger share of income-paying properties pay their 
incomes to their owners either directly in the form of a series 
of services, or in the form of a hire received from the borrower 
as consumer of the service. But any of these pieces of 
property the enterpreneur may hire or buy : and the out- 
lays therefore rank then as one more item of cost within 
his aggregate of costs. 

We are, then, ready to sum up this phase of our analysis : 
Valuable products are termed commodities or services ac- 
cordingly as they have or have not durable possessions as a 
basis. Commodities ready for consumption as well as durable 
bases of value are termed wealth or property — wealth hav- 
ing some vague quantitative reference to value, property 
little or none of this reference. Durable forms of possessions 
receiving a valuation in terms of money, a price, are called 
capital. Wealth, that is to say, is a general and passably 
vague term for all valuable possessions or property, durable 
or other, and is distinctly an economic concept : property is 
primarily a legal concept, an owned thing : capital is durable 
property or wealth expressed under the price denominator. 

Rent distinguished from interest. — Those incomes which 
with passing time accrue to the individual from his posses- 
sions are called now (1) rent, and now (2) interest, accord- 
ingly as the income refers (1) to the aspect of its source as 
more possession or (2) to the capital aspect of its source. 
Thus rent to the owner is the compensation expressed as so 
much corn or chickens or money paid as the hire of a cer- 
tain item of wealth. Interest is this same hire rendered 
into money terms and expressed as hundredths paid for a 
specified time upon the money value of the possessed capital. 
Interest, in other words, is compensation computed upon 
the basis of a dollar-time unit ; for example, so many cents 
per dollar per year. So we may say that the hire of an item 
of property, say a horse, is $10 per month, or that the rent 
or hire of a machine is $10 per year. This manner of state- 
ment looks at the case from the point of view of the renter, 
the user. The owner, also, after having deducted charges 



WHAT IS PRODUCTION f 133 

for care, supervision, expense, depreciation, and the like, 
may express the net earning power of the horse or of the 
machine at $5 per year. This still falls short of the interest 
statement and is merely rent ; only when the owner computes 
these earnings as a 5 per cent per annum income on a $100 
property or upon $100 of capital has he carried the case over 
into the interest terminology. 

An illuminating parallel may be found in the terminology of 
transportation. How are the earnings of freights running? It 
will not do to report in terms of so much per ton for the freight 
moved ; this would tell nothing specific until it were known whether 
the average haul were long or short. And it would mean even 
less to report that the freight charges were so much per mile, without 
reference to how much was carried ; a certain unit of weight or 
bulk is needed. But when the earnings are given as so much per 
ton-mile, the case is rendered over into a common denominator 
precise for the purpose. The dollar-time unit for capital is pre- 
cisely such a composite unit : 500 for two years earns, say, $50 ; 
1000 for one year earns $50. Both manifest the same interest 
rate, that is, the same earning power per dollar-time unit. With 
money, obviously, or with purchasing power in terms of money, 
only the term interest is appropriate, although even here interest 
is sometimes inaccurately called the rent of money. 

Are costs restricted to four classes? or directed to the 
public weal? — The entrepreneur computation of costs in- 
cludes items other than wages on labor, rents of instruments, 
interest on the value fund invested, and the entrepreneur's 
own necessary profits. It is a dangerous inaccuracy to 
restrict costs to these four forms of charge, although it is 
true that these are of leading importance. Other costs, as, 
for example, risk burdens, are to be computed ; taxes are 
often to be included and are of considerable significance; 
advertising expenses are also to be added ; and together with 
all these, there are a multitude of other items, some of them 
in different degrees reducible to some one of the four dif- 
ferent categories, but rarely if ever entirely so reducible. 
For example, deterioration charges, or upkeep outlays, or 
subscriptions to public or quasi-public or even to private 
purposes — subscriptions made, nevertheless, on grounds 



134 THE ECONOMICS OF ENTERPRISE 

of business expediency — must be included ; tickets to the 
church supper must be bought, contributions to the 
Sunday-school picnic submitted to, copies of the War Cry 
accepted at 5 cents each. All things which, from the entrepre- 
neur point of view, appear to be expedient expenditure for 
the purposes of creating either a commodity or a situation of 
market value, are outlays of capital taking rank as costs 
of production. When the purchase of machinery is an ad- 
visable move in business policy, capital goes into it, as at 
another time into land or labor ; when, in good business 
policy, a franchise or a patent must be procured, capital is, 
in either case, so directed as to accomplish the necessary 
thing. When, for equally cogent business reasons, legis- 
latures or city councils must be bought, the necessary out- 
lays are, for business purposes, precisely like expenditures 
for machinery or for the control of patented processes. 
Tramway franchises and sugar-refining tariffs, as privileges 
obtained in the business process through the expenditure of 
capital, disclose in the current market prices of the stock the 
present worth of the forecasted gains. So the expenses of 
stifling competition are capital outlays, invested as the 
costs of a monopoly to be obtained ; so also the tribute paid 
to escape cut-throat competition is a capital cost of pro- 
duction.^ For competitive purposes product is proceeds. 

Summary : All utility is ultimately a desirable experience. 
But only when both desirable and scarce can anything at- 
tract a price — prompt, that is, the sacrifice of purchasing 
power either in getting it or in retaining it. Economic in- 
come implies, therefore, more than mere utility received ; it 
must be a valuable utility. 

All things, situations, or facts, that command for an indi- 
vidual either a money income or an experience which he would 
pay money to get or demand money to forego, are productive 
in the economic sense, irrespective of whether the sources 
are material or the incomes material, and irrespective also of 
whether the results are permanent or wholesome or com- 
mendable, or are consistent, either in the getting or the using, 
with the welfare of others or with the general welfare. 

1 Cf . Veblen, "Modem Business Capital," The Theory of Busi- 
ness Enterprise, Chap. VI. 



WHAT IS PRODUCTION? 135 

Productivity must, in fact, be interpreted purely as a com- 
petitive category in the price regime. As competitive, the 
point of view from which to regard it must be the individual 
point of view, with private gain the sole and ultimate test, 
and with price as the standard. All labor, therefore, that 
commands a price, though it be the poisoning of a neighbor's 
cow or the shooting of an upright judge, all durable goods 
commanding a rent or affording a valuable service — lands, 
machines, burglars' jimmies, houses, pianos, freight cars, 
passenger cars, pleasure boats — all patents, privileges, 
claims, franchises, monopolies, tax-farming contracts, that 
bring an income — all advertising, lying, earning, finding, 
begging, picking, or stealing, that achieve a reward in price, 
or a return which is worth a price — are productive by the 
supreme and ultimate test of private gain. The meaning 
of product is proceeds. 

The chapter also suggests — what later chapters will 
further elaborate — that all investment in enterprise for gain 
is productive investment and therefore capital. Rent and 
interest are equally incomes from capital, rented properties 
and rental incomes becoming respectively capital and inter- 
est, as soon as the property receives a price statement and the 
income gets expression in terms of a percentage upon the 
price of its basis. Interest is merely income reduced to a 
dollar-time unit. Capital is a durable possession expressed in 
terms of price — the basis of an income accruing with lapse 
of time. In other words, all durable goods yielding an in- 
come susceptible of a price expression are capital by virtue of 
that income. 

The following chapter, somewhat restricting the scope of 
the discussion, will examine the relations of the proceeds of 
the labor and instruments employed in a joint productive 
process to the compensations received by such labor and such 
instruments. That is to say, the chapter will examine the 
principles and the process according to which the joint pro- 
ceeds of several cooperating factors in production are divided 
— are distributed — among those factors. It will show that 
distribution, as so restricted, is merely one aspect of com- 
petitive production ; that the price outlays in the entrepre- 
neur's cost of production are merely the entrepreneur method 
of distributing among the cooperating factors their respective 
shares out of the proceeds which they have contributed to 



136 THE ECONOMICS OF ENTERPRISE 

produce ; that the process is exclusively a price process and 
all the terrns in it price terms — the joint proceeds price pro- 
ceeds, the shares price shares ; that as the product is the 
price remuneration to the entrepreneur for his costs, — is 
his reward, — so the costs are the price remunerations to the 
employed factors for their service to the entrepreneur in his 
undertaking ; that not only are the costs in the productive 
process price items, and the distributive shares in the dis- 
tributive process price items, but that the productive process 
and the distributive process are the same process, and the 
cost items and the distributive items the same items. It will 
then be manifest that each distributed cost is merely the 
market price of a productive efficiency ; and that just as the 
market price of a consumption good neither expresses its 
utility nor measures it, and is neither determined by it nor 
measured by it, so the market price of each productive 
efficiency cannot express the quantum of that efficiency, is 
not equal to it, is not determined by it, does not measure it, 
and is not measured by it. And finally, with reference to 
productive efficiency, regarded as a specific or definite 
quality or quantity or attribute or power, it will be shown 
that there is no such thing. 



CHAPTER X 

THE DISTRIBUTIVE PROCESS : APPORTIONMENT OF PROCEEDS 

The productivity theory. — The problem of distribu- 
tion is the problem of explaining how the aggregate income 
of consumable goods in society is subdivided into the vari- 
ous individual incomes. With a given total of products 
to be consumed, how are the shares apportioned? What 
forces determine the size of each share, and the sizes of the 
shares relatively to one another, and what is the process 
of the determination? Why and how does each individual 
get what he gets? If it is by the degree of his deserving, 
how much does he deserve? What is known as the pro- 
ductivity theory of distribution attempts to show that, 
undCT'^eflect competitlon7~eaeh individual will receive out 
of the aggregate social income precisely what he has con- 
tributed to this aggregate income, his share being thus — 
it is urged — precisely commensurate with his deserving : 
what he gets he deserves, and what he deserves he gets. 
How far the productivity theory, so interpreted, is tenable, 
whether accurately and precisely, or merely vaguely and gen- 
erally, and how far the theory, if established, must involve 
an ethical approval of the processes and results of the com- 
petitive system, it will be the task of the present chapter to 
consider. 

Aggregate of incomes equals aggregate of products. — 
So much as this, at least, must be obvious : What the mem- 
bers of society in the aggregate have to consume depends 
upon the total of the goods that are produced in society. 
Every dividend conditions its quotient ; the parts make up 
the whole. With a given quantum to divide — to distrib- 
ute — if some get more, others get less. Thus the problem of 
, distribution assumes a distrihuend, just as the problem of 

137 



138 THE ECONOMICS OF ENTERPRISE 

division must assume a dividend. The ultimate distri- 
bution of wealth reports merely the different shares or frac- 
tions which the different members of society get to consume 
out of the total product for consumption. 

Distribution is a price process. — But it must be noted 
that the entire process of distribution is a price process. 
Marketable products are price facts. The sums paid to 
the factors entering into production are price sums. The 
distributive shares, apportioned as prices to the factors that 
have jointly produced a price product, are merely the price 
costs which the entrepreneur has advanced in the process 
of bringing into existence a price product. Thus the pro- 
cess of distributing the product is part and parcel of the 
process of getting it produced. Both the distributed prod- 
uct and the distributive shares out of it are price items. 
The study of entrepreneur production is, therefore, necessarily 
the study of distribution, so far, at least, as the distributive 
process confines itself to the subdividing of a joint product 
among the factors cooperating in its production. It is, 
in fact, solely the distributive aspects of the productive 
process that the present chapter will consider. 

Primary and secondary distributions. — Not the less, however, 
is it to be recognized that the distribution which accompanies 
production is not the sole distributive process, or even the sole 
process worthy of study ; it is merely the primary process, the pro- 
cess fundamental to many occondary or derivative processes. Many 
individual incomes are derived immediately from the public treasury 
by pension, or grant, or sinecure, or by other pubUc gift. But 
the government collects its revenues directly or indirectly out of 
individual incomes, as a mere redistribution of incomes already 
once distributed. So the incomes of the prisoners in the jails 
or asylums and of the paupers and the hospital patients are of the 
same sort. In greater or less degree, also, the incomes of most 
women and children and of the recipients of private charity are to 
be ranked as distributed under secondary processes. So again of 
inheritances. 

But the pressing problem with us is the primary process 
— merely, perhaps, because it is primary. How does this 
process take place, and what are its determinants? What 



THE DISTRIBUTIVE PROCESS 139 

fixes for any entrepreneur the price-wage that he must pay 
for labor, and the price-rents for land and other instrumental 
goods, and the price-charge for the use of his own invested 
funds ? And it merely restates the question to inquire what 
determines in industry the wage earner's share, the land- 
lord's share, the instrument owner's share, and the fund- 
lender's share, and the entrepreneur's own personal share 
of the joint price product. When once we have come to 
understand the fixation of wages separately, and the fixation 
of land rents separately, and the fixation of interest rates 
separately, and all of these in relation to the proceeds de- 
rived from them, and all of the foregoing in their relations 
to one another and in their reactions upon one another, we 
shall have solved all that is capable of solution in the dis- 
tributive problem. 

The role of the entrepreneur. — So much, however, as this 
is already clear ; the entire process is, at every stage of it, 
a price process in the competitive price mechanism. The 
finished products get their prices, and the raw materials 
get their prices, through the typical and ordinary price pro- 
cesses already studied in earlier chapters. So, the wages 
of labor, the prices of lands and the rents of lands, the prices 
of machines and the rents of machines, all are fixed through 
the demand and supply process at the equating point be- 
tween demand and supply. In the main, then, the process 
is captained by the entrepreneur, is guided and supervised 
by him, and worked out through him. It may, indeed, be 
said to be entirely so worked out and guided, if only the con- 
cept of entrepreneurship be given its proper extension. All 
employers of labor or of instrumental goods for hire are en- 
trepreneurs, no matter whether the prospective product is 
to be offered for sale or not. If it have no sale price, it is 
because it has a reservation price ; it is still a price product. 
The client of the lawyer or the patient of the doctor, the 
master in his hiring of his house servants or his valet, the 
employer of labor in the raising of garden products for the 
home table, are all bidders for factors of production and are 
entrepreneurs for this — and for every other — purpose of 
economic analysis. 



140 THE ECONOMICS OF ENTERPRISE 

How far is the productivity theory valid ? — We are now 
ready to undertake the examination of the productivity 
theory of distribution : Is it true that the prices attaching 
as costs to the productive factors, and constituting the dis- 

.tributed shares of the price product, are received by title 
of contributing to the existence of the derived price item? 
We shall see that so much as this of the productivity theory 
must be both accepted and emphasized. The motive of 
the entrepreneur is his own gain. It is with this gain in 
prospect, prompted, induced, and guided by it, that he pays 
for the things that will help him achieve it, and pays for 
nothing else. Paying as little as he must, competition will 
ordinarily compel him to pay not far from all that he can. 
And as the price product is the motive, so also it is the 
limit, of his disposition to pay. In essentials, the entre- 
preneur is a buyer of services and a seller of their products. 
The sale price is the purpose, the justification, and, in this 
sense, the cause, of the outlay prices. 

- The productivity theory, therefore, when interpreted 
to mean no more than this, is not merely defensible ; it is 
axiomatic. But, fortunately or unfortunately, this is not all 
of it. It asserts not merely that the distributive shares are 
the market price of the services — as they obviously are — 
but also that, if competition be perfect, these distri butive 
shares, these cost outlays, mu¥t be the ^precise and accurate 
equivalent of the respective contributions of the factors to 
the bringing about of the price product ; that what is paid 
IS not only paid for the services rendered, but is paid in pre- 
cise adjustment to the amount of the service ; that the pro- 
ductivity of the factor is capable of precise ascertainment and 
of precise comparison with its remuneration, and that from 
this comparison their precise equivalence is demonstrable. 
Thus, both ethically and economically, the distributive 
process in the competitive order is approved and justified. 
What the factors deserve they get, and what they get they 
deserve ; the results are good ; the price process is a righteous 
process. 

Recalling once more the terms in which the distributive 
process presents itself — the process a price and market pro- 



THE DISTRIBUTIVE PROCESS 141 

cess, the thing to be distributed an item of market price, 
the distributive shares each items of market price — and 
recalling also that demand and supply are everywhere the 
modes in which the forces bearing upon price attain their 
final expression, we return again to an examination of de- 
mand and supply, as related (1) to consumable products, 
and (2) to the factors employed in bringing forth the con- 
sumable products. 

The Peices of Consumable Peoducts 
(A) The Demand: 

The mere mechanical details of the fixation of price have 
already been sufficiently examined. (See Chap. V.) Either 
expressly or by implication also, the demand for any partic- 
ular kind of goods has been, for the present purpose, suffi- 
ciently discussed. This demand is made up of the different 
respective maximum price bids which the bidders are dis- 
posed to offer for each respective item of the commodity 
under consideration. When or how the purchasing power 
was obtained, whether by turning commodities into the me- 
dium of exchange, or by gift from other individuals or from 
the government, or by inheritance, or by theft, or- as wage, 
or as bribe, does not at all matter for the purpose. In any 
case there is a disposable purchasing power in the form of 
money or its equivalent. 

Fluctuations in the volume of this money demand bear- 
ing upon any one consumable product are frequent and occur 
from many different causes : (1) Changes slow or rapid in 
the supply of purchasing media, (2) changes in desires, or 
(3) as the more common cause, changes in the prices of other 
commodities competing for the application of this disposable 
purchasing power. Lower price-offers may, for example, be 
made for potatoes, not because of any change in the supply 
of them or in the hunger for them, but solely by the fact that 
bread has become cheaper ; or, if house rents rise, there may 
be the less to pay either for potatoes or for bread. These 
interrelations are, indeed, many and complicated. Dearer 
timber may make iron or coal dearer and may make building 



142 THE ECONOMICS OF ENTERPRISE 

lots cheaper. More plentiful supplies of coarse wool may- 
raise the value of the fine wool for mixing, the while lower- 
ing the value of cotton. If horses are scarce, this may depress 
the prices of wagons and raise the prices of automobiles. 

(B) The Supply of Consumable Products: 

Changes in supply come about through influences funda- 
mentally parallel to those which cause all changes of demand, 
only that on the supply side of the case the guiding and ad- 
justing function of the entrepreneur is especially in evidence. 
As on the demand side the maximum price-offer was arrived 
at through a comparison of the advantages of buying one 
thing as against another, so on the supply side the choice 
of a line of production is ultimately a comparison of the 
advantages of producing one thing as against doing some- 
thing else — or doing nothing. 

Nevertheless the analysis of supply is a much more 
complicated matter than that of demand. Not merely 
have the relative costs of different products to be com- 
puted in selecting one's line of production, but compar- 
ison must be made of the ratios of these to the selling 
prices. Thus the relative advantages of a particular 
occupation as against the most attractive alternative occu- 
pation may be affected by a rise or by a fall in the price of 
the products of either of the occupations under comparison, 
or by either a rise or a fall in the costs of either occupation. 
Different influences may, in truth, differently affect all the 
different items that together furnish the basis of the aggre- 
gate costs of either commodity. Lumber costs or fuel costs, 
for example, may be rising for one product. This rise in 
lumber or fuel may be clue to the diminishing supply of 
lumber or of coal. Equally well, however, may the cause 
be found in the pressure of the demand of other industries 
upon this lumber or upon this fuel. Prices of products in 
other woodworking industries may be going up, or a 
diminishing supply of other materials may be increasing 
the demand for wood — and so on in endless possibility. 
And likewise all this multitude of combinations finds a 



THE DISTRIBUTIVE PROCESS 143 

parallel in the process of working out the relative advantages 
of labor and of entrepreneur ability in different fields, and 
thereby the varying significance of wages and profits as 
costs. 

The entrepreneur again. — For — let it be once more repeated 
— all this bewilderment of details and all this complexity of in- 
fluences reach expression, in a form appropriate to affect the supply 
and thereby the market price, solely through the entrepreneur 
computation of costs. From the entrepreneur point of view — 
the demand being assumed — the relative prices of goods depend 
upon the relative supplies of goods, and these in turn depend upon 
the relative costs of goods. These relative costs are worked out 
by the entrepreneurs in their effort to achieve their maximum 
gains. 

Nor is this entrepreneur method of analysis — this cost-of- 
production manner of approach — unfaithful to the facts. The 
difficulty is that, carried no farther than the entrepreneur is con- 
cerned to carry it, it hardly more than brushes the surface of the 
problem of the prices of products and of the prices of the cost items 
entering into them — the distributive shares. It concerns itself 
solely with the last item in a long series of causal connections. Its 
seemingly definitive data are really not much better than interroga- 
tion points. In truth, its service to the economist is not so much 
in explaining prices as in indicating the path along which explana- 
tion must be sought. The ultimate forces in the problem are, 
then: (1) the human desires for products, affording motive for 
the aggregate social product of goods to be exchanged against 
one another, and expressing themselves, also, in any one price- 
offer schedule, as the market demand in terms of money for that 
particular line of goods; (2) the productive capacities of human 
beings and the instrumental equipment at their disposal. 

Thus the relative strength of the different needs of different human 
beings, working out under the guise of the different price-offers, 
and set over against the relative difficulty of satisfying these needs, 
functions as the ultimate determinant in the problem. In its 
concrete working out in the competitive entrepreneur process, 
relative costs of production come to determine relative prices. But 
as included within these relative costs reporting the price aggregate 
of all the different resistances to the production of each particular 
commodity, full account must be taken of the opposing influences 
of other competing demands. In truth, only with a full recognition 
of the opportunity cost principle does the doctrine of entrepreneur 



144 THE ECONOMICS OF ENTERPRISE 

cost come into working touch with the actual facts of business. 
Any attempt to explain price by an appeal to the supply side of the 
market price equation is hopeless, unless on terms of constant 
reference to the principle of opportunity cost. For commodities 
in general, and especially for any particular commodity, the motive 
force behind supply is demand. Cost, indeed, is itself mostly 
traceable to resisting demands. The alternative uses of the factors 
promising gain or the alternative opportunities of the entrepreneur 
resist the particular product. Changes in the cost of production of 
the particular commodity — which are commonly due to changes in 
the prices of other commodities — modify the supply of the particu- 
lar commodity ; and changes in supply, resulting often solely from 
changes in costs, in turn modify the price. Price is a resultant 
from the forces of demand and supply, but the costs of production 
which lie behind supply to explain it are themselves in large part 
resultants from other directions of demand. As ultimate explana- 
tion, demand being taken for granted, the causal sequence in the 
problem runs, therefore, on the supply side of the investigation, 
from the scarcity of the factor to the scarcity of its product, thence 
to the high price of the product, thence to the rent or hire of the 
factor. 

The prices of productive factors. — It follows that not 
even from the entrepreneur point of view are the compensa- 
tions of the factors to be regarded as the primary and fun- 
damental elements in the fixation of price, but rather as 
distributive shares received by the different cooperating fac- 
tors out of the apportionment of their jointly produced price 
product. 

Demand for factors and demand for product. — The salary 
which the actor or the singer receives is explained in a gen- 
eral way by the fact that there are people who enjoy the 
theater or the concert. Tuition is paid because teaching 
is wanted. Waiters and valets command wages because 
there are people who desire their sort of services. So 
carpenters are hired and paid because people want houses ; 
textile machines because there is a need for textiles ; wheat, 
grain, and bakers because there is a need for bread. The 
demand for productive agents and instruments is due to the 
demand for their products. 



THE DISTRIBUTIVE PROCESS 145 

Utility of product as related to its price. — But, as we have 
already seen, the utiUty of a product, the degree in which an indi- 
vidual desires it, has nothing directly to say as to what he will 
pay for it. He may have nothing to pay with, being much better 
provided with needs than with purchasing power. True it is that 
were the utility lacking, were there no want, there would be no 
money demand. But it is equally clear that there may be utility 
without the money demand. And when there is money to pay with, 
the amount which will be paid for a given sort of commodity is 
not a question of how much it is wanted absolutely, but only of 
how much it is wanted relatively to other things. It is impos- 
sible to go directly from utility to the individual's maximum price- 
offer, his money demand. 

Nor, were it possible, would the case for the utility ex- 
planation of value be greatly helped. The price-offers are 
man}'-, and the market price is one. Because the buyers 
are different their maximum price-offers differ. The price 
actually fixed in the market coincides with only the mar- 
ginal price-offers, if, indeed, there are any that are precisely 
marginal. To all the other buyers there accrues a surplus 
advantage, expressible only as an avoided price outlay, or as 
a price differential between what might have been paid and 
what was actually paid. Buyers, then, do not pay for any 
commodity according either to utility or to their respective 
price-paying dispositions. 

And the same line of reasoning holds with reference to 
the hiring or the buying of agents and instruments of pro- 
duction. If one employs some one to play or to sing for 
him, it is not necessarily or commonly true that the actual 
payment coincides with the maximum possible payment. 
Most people would pay more than they do pay rather than 
go without the services of the garbage man, the plumber, 
the cook, or the washerwoman, just as truly as they would 
pay more rather than lack bread or shelter or clothing or 
chairs or any one of the many things that are offered for 
sale. In all cases it is the valuable result that motivates 
wages; but it does not precisely determine them. Pro- 
ductivity, therefore, is not accurately reported in the market 
price. 



146 THE ECONOMICS OF ENTERPRISE 

The efficiency — the utility — of a factor as related to 
its hire. — Not less clear is the same principle in its applica- 
tion to the entrepreneur hiring of land or labor or machinery 
in the preparation of goods for the market. The actual 
payment ordinarily falls appreciably short of what would 
have been justified as a maximum outlay. In practically 
all of these relations of hiring or of purchase — in all, indeed, 
but the case accurately marginal — there is a surplus of 
return in price over outlay in price. Price gain motivates 
the outlay, but does not accurately determine it. The rent 
or the price is the market value of the service for gain rather 
than the accurate equivalent of it. 

Parallel between production and consumption goods. — 
The truth is that to interpret the wage or the rent of any 
factor of production as the precise correlative or equivalent 
of its gain-rendering efficiency is parallel to regarding the 
market price of a consumption good as the precise correla- 
tive of its utility. No doubt the gain-aiding efficiency of 
an instrumental good is commonly its sole utility. The 
difficulty is, however, that this utility for the processes of 
gain is a different utility for each different entrepreneur. 
Just as there is no such thing as one specific utility in a con- 
sumption good, so there is no such thing as a specific efficiency 
for gain in an acquisition good. Importance for gain, like 
utility, is a relation to a particular individual. There is 
neither gainfulness nor atility at large or socially or gener- 
ally. Proof of this, if proof be called for, is easily at hand 
in the ordinary phenomena of the market. The process by 
which the market rent or wage or price of any factor of pro- 
duction is fixed is not different from that by which a price 
is reached for any consumption good. The different maxi- 
mum offers of the entrepreneurs for the acquisition good — 
corresponding to the different bids of the consuming public 
for consumption goods — constitute the demand schedule 
or curve : over against this there is the supply to be marketed. 
The market price so reached can express neither a specific 
utility in a consumption good nor a specific power for gain in 
a production good. 

And there is a further difficulty : Precisely as the maximum 



THE DISTRIBUTIVE PROCESS 147 

price-offer of any particular bidder expresses not the utility 
to him of any particular good, but only what he can afford 
to pay for it as over against some alternative application of 
his purchasing power, so the maximum bid of the entre- 
preneur expresses not the specific and independent efficiency 
for gain in the factor, but only the fact that this is all the 
entrepreneur can afford to pay for it. Possibly the limit of pay- 
ment may be found in the advantages obtainable from some 
alternative fact — more land instead of more labor, or more 
labor instead of more machines or more land, or other labor or 
land or machinery as against the particular item of labor or 
land or machinery. Commonly, also, the particular item 
is needed to supplement and complete a particular equip- .^ 
ment already in hand. The different factors of production"? "y^ 
must work together to achieve their greatest effectiveness, i 
Land without tools, labor without land, tools without land \ 
or labor, would return a meager product. It is to this fact ; 
of joint employment that most of the product is due. That 
the factors are brought together is itself the proof of an ad- 
vantage attaching to the mere fact of their conjunction. : 
How then proceed to attribute to any one of the factors the 
increase of the proceeds due to the joint employment? So 
long as either glove is necessary to the worth of the pair, ' 
how tell how much either is worth? Which leg of a three-, 
legged stool supports the stool? All that we can say is 
that if the stool is worth $3, one can afford to pay $3 not to | 
be deprived of any one leg of it. So $2 may be offered to | 
get back a lost glove out of a $2 pair. Thus it is easy enough I 
for the entrepreneur to determine how much he can afford | 
ito pay for an item of productive goods or labor to go with ! 
ihis present equipment, but this is not at all to attribute to 
the extra item all the increase of gain which will accrue 
with the addition of the extra item. One buys, say a 
liorse, to go with a wagon which otherwise would be useless. 
But this is not to attribute to the horse all of the result from 
both horse and wagon. The horse would be equally useless 
without the wagon. In the last analysis, the entrepreneur 
himself could not isolate and determine a specific service- 
ability for gain relatively even to himself, but only that 



148 THE ECONOMICS OF ENTERPRISE 

which he can afford to pay to get the thing or to refuse to 
keep the thing. And, as we have seen, no one of all these 
different sums that the different entrepreneurs can respec- 
tively afford to pay or refuse has any special title to be re- 
garded as the specific significance of the productive factor. 

The argument against the productivity theory sums up 
then in this : That it is beyond the wisdom of any entre- 
preneur to make accurate ascription of the efficiency for 
gain in any one of the business factors jointly engaged in 
his gain-seeking process ; still more is it impossible to re- 
gard the remuneration which is accorded to any one of several 
factors, in its market rental or price, as precisely expressive 
of its gain-aiding efficiency. As much as the entrepreneur 
can do is to attribute to each factor a degree of serviceability 
for his ends commensurate with what he has to pay for it 
and to treat whatever is left as due to his own personal activ- 
ity in the quest for gain. But this is crude in theory ; his 
profit is partly due to the fact that he is able to make an 
intermediate good or agent signify more to him in gain than 
he has to pay for it in wages or rent. 

This reasoning may seem to put in question the strict accuracy 
of the definition of profit already given — the remuneration of the 
entrepreneur for his personal gainful activity. But perhaps it 
may be enough to say that there is in this definition no implica- 
tion that the remuneration is the precise correlative of the power 
for gain residing in the individual and separate activity of the 
entrepreneur. The profit is merely what he gets for the activity. 

This impossibility of telling precisely what a factor of production 
earns may seem to disclose a difficulty in telling precisely what a 
factor costs ; for often it is true that the cost in any particular 
employment is the alternative gain possible in another use. 

But, evidently, what the factor earns in its actual employment 
and what it could be made to earn in some other employment — 
its displacement cost — can rarely coincide. The justification 
for the actual employment is precisely in this fact that there is 
a difference in its favor. The cost in any given use is the resistance, 
the debit, against that use. The amount of gain from the use ia 
another matter. 



THE DISTRIBUTIVE PROCESS 149 

This debit may be (1) merely what has to be paid as hire for the 
thing ; or (2) a sum, greater than the hire, that one could get by 
renting it out or selling it ; or (3) the still greater sum that one 
could get from it himself in another employment. 

It is under this third possibility that the distributive analysis 
appears to present a difficulty for the cost analysis : if it cannot 
be told how much the thing produces in its actual use, how tell 
how much it would produce in its potential use ? And if this latter 
is also impossible, how tell how far the alternative use is to function 
as resistance to the actual use? The cost, no doubt, is resistance 
to the process, while distributive shares are remunerations out of it. 
But in the case in hand, the cost in one use appears to be the dis- 
tributive share possible in another use. How ascertain how great 
would be the gain there, in order to tell how great is the resistance 
here? 

But the solution of the difficulty is in the very principle under 
present emphasis : The entrepreneur can estimate — and, at the 
margin, must estimate — what he can afford to pay for the thing 
in the given employment rather than go without it ; but this is 
not to tell how much of gain he expects specifically and independ- 
ently from the thing, but only from it as one thing present in the 
total complex — from it in connection with the other things — 
from it as part of the " togetherness." .,.,--^ 

Similarly the entrepreneur is able to tell — or to estimate — how 
much it would signify to him to have the services of the given 
thing in some other undertaking; but here again, this is not to 
tell how much is its separate productivity there, but only what it 
would signify to have it there to go with whatever else is there. 

It may of course be clear to the entrepreneur that it is not best 
in any case to divide his complex — that he must keep it together 
as a whole where it now is, or transfer it as a whole to some other 
business ; in that case his cost analysis is not concerned with this 
problem of separate imputation. Equally well, however, he may 
have to consider whether he shall not rent out some part of his 
equipment, retaining the rest, or take some share of his funds out 
of his business for other investment, or call in some share of his 
other investments for the purpose of enlarging the particular 
business in hand. He may then have to ascribe a separate cost 
bearing to a separate factor, — may have to determine what the 
lack of the thing somewhere else would mean to him. But this 
is not to attribute to the thing a separate and specific productivity 
somewhere else. 



150 THE ECONOMICS OF ENTERPRISE 

It is to be freely admitted that the cost doctrine and the cost 
computation here presented may have small significance for many 
of the purposes of business accounting. Everything depends on 
what the business man is trying to get at in his accounts. If his 
accounting is for the purpose of telling him what the gains from his 
business are — how large is the net balance, he need not be at all 
concerned to know how much his gains might elsewhere be. The 
cost account — so called — for his purposes will amount merely 
to an outlay and depreciation account, and may involve no refer- 
ence to alternative profits or alternative interest or alternative 
products of any sort. He is interested merely in arriving at a net 
balance. 

But for the economist the problem is not to arrive at the net 
gain, but to explain market price and to analyze cost of production 
as an influence bearing, through supply, on price. For his purposes, 
therefore, cost, as the key to market supply, must sum up the 
resistances to the forthcoming of product. 

In point of fact, also, the economist's line of analysis is in some 
cases very important to good business practice. Shall, for example, 
the Steel Corporation accept a particular order? To decide in 
the affirmative must imply not only a balance of gain in prospect 
above the outlays but also that this balance outranks any alter- 
native balance. It is the relative and not the absolute gain that 
is decisive in most cost problems. So, in striking a dividend 
balance, cost may mean one thing ; but in the making of dividends, 
another sort of accounting and another meaning for cost must be 
recognized. Not any sort of a balance, but only the maximum 
balance, leads to the maximum dividend. 

The element of truth. — It thus appears that only in the 
sense of a large and vague general principle can the produc- 
tivity theory be adjudged to be valid, and then only in the 
sense that identifies product with proceeds. It is, indeed, 
past question that the bid of the entrepreneur for the serv- 
ices of any factor must find its motive and basis in the added 
gain result in prospect. It is gain that furnishes the motive 
of his bid, precisely as it is this same gain that prescribes 
the limit upon his bid. And in a general way it must be 
true, if competition is effective and complete, that the entre- 
preneur pays not greatly less for the factor than what he 
can afford to pay. Interpreted, then, to mean not more 
than this, the productivity theory is unquestionably tenable : 



THE DISTRIBUTIVE PROCESS 151 

but forthwith it is to be added that so interpreted it is as 
trite as it is tenable — is, indeed, almost self-evident. 

The errors and excesses. — The theory, however, goes 
much further than this to positions distinctively its own. 
It says that under perfect competition the distributive share 
apportioned to each factor would be the precise and accurate 
correlative of its contribution to gain; that the amount of 
this contribution is capable of being accurately determined, 
and the coincidence of it with the amount of compensation 
established. The corollaries are also formulated without 
compromise or ambiguity : (1) the competitive system is 
good so far as it is really competitive ; (2) as a system, com- 
petition contains, in itself and by its own inner necessity, 
the warrant and the gTiarantee of justice; if anywhere it 
falls short of complete equity, there is, in this very fact, 
proof that somewhere the competitive process has not been 
carried out to the full. The logic of the system is a perfect 
ethics. Therefore any other economic order, diverging in 
its results from what perfect competition would achieve, 
is by this very fact discredited. 

Product must mean proceeds. — For an accurate under- 
standing of the issues involved, it must first be recognized 
that the productivity under consideration means, and can 
mean, nothing more than private gain in terms of price — 
proceeds. When the entrepreneur pays a wage or a rent, 
he really pays for the result that he hopes to attain. It is 
to get an increment of price that he consents to undergo a 
price outlay. It is this price increment that sets also the 
outside limit upon his disposition to pay. This produc- 
tivity theory appears, then, to declare that what the em- 
ployed factor gets is what the employer can afford to pay. 
In fact, he does not always pay thus much. But it is in 
any case clear that only a product in terms of price can serve 
as a motive or a basis for a price outlay. No one pays or gets 
paid for the doing of a thing that is merely useful. 

Employers' surpluses. — Whether there is any other test 
of the service for gain attaching to a day's labor than the 
market price that the labor commands — whether, that is 



152 THE ECONOMICS OF ENTERPRISE 

to say, the theory does not determine what the labor ac- 
comphshes by finding out what it gets, as the basis for the 
conclusion that what it gets it accomplishes, is a question 
which must for the moment be postponed. If, however, 
the theory be taken to assert that under perfect competition 
the employer would have to pay as wage or as rent all that 
he can at the outside pay, the defect in the theory lies in 
the simple untruth of the assertion. Entrepreneurs, as 
we have seen, differ in skill and in the direction of their 
skill. The actual hire of any serviceable fact, even if pre- 
cisely coincident with the maximum bid of some one compet- 
ing bidder, is altogether unlikely to be coincident with the 
maximum bid of the successful competitor. All that the 
latter needs pay is enough to outbid the next strongest bid- ■ 
der's bid. There may be, and commonly is, for the success- 
ful bidder, an appreciable differential between the possible 
bid and the actual bid. One housewife, for example, gets 
good service cheaply from a maid that no other woman can 
get along with at any wage. Stonewall Jackson's efficiency 
as a corps commander was in no small part in his peculiar 
adaptation to the needs and the abilities of his particular 
chief. One foreman gets excellent results from one man, 
and entirely fails with another and perhaps a better man. 
You like the man that I dislike and dislike the man that I 
like. Efficiency is a quality only in the sense that it is a rela- 
tion : it is a different relation to each different entrepreneur. 

And even when there are a large number of similar pro- 
duction goods to be sold or rented, the price or hire that 
each can command will not depend upon any specific effi- 
ciency of each item or of any item ; for with every change 
in supply a new efficiency must attach. 

And even if this difficulty be met, something more serious 
is in waiting : for if the successful bidder for the isolated 
item, or any successful bidder for any part out of a stock of 
items, were to withdraw from the competition, the selling 
or renting price would necessarily fall. A new marginal 
adjustment would be arrived at at a new — and another — 
so-called specific productivity. But this must imply that the 
larger significance to the out-bidding entrepreneur was due 



THE DISTRIBUTIVE PROCESS 153 

in part to his presence : it was a gain-giving significance 
relative to him and greater than the other significances by 
reason of this special relation to him. But if the " produc- 
tivity " differs as different entrepreneurs are present or 
absent, and differs with each different entrepreneur, it is 
clearly not a " specific " productivity. It is relative, pre- 
cisely as all utility is relative. 

The productivity theory may plausibly be rested either on the 
uncritical assumption of the fixation of price by marginal utility, 
or of the existence of the social organism. The two assumptions 
are really one, inasmuch as the first of these doctrines can have 
no possible standing unless upon the assumption of the second — 
and no very tenable standing even then. 

Assume, however, as a premise, that the price of a consumption 
good is determined by its social marginal utility, or is somehow 
commensurate with it. Productive goods or services will then 
be paid for, it is argued, in direct ratio to their services in the pro- 
duction of the socially valued products ; the remunerations are 
derivative from social marginal utility, and accurately express the 
contribution to it. The steps may then be reversed to show that 
the price of the consumption good expresses, in turn, its marginal 
utihty. The production goods are now taken to be remunerated 
according to the social utility of their services; these remunera- 
tions are costs of production ; the goods sell as determined by their 
costs ; therefore they sell in proportion to the social utility inhering 
in the factors of production to which the products owe their 
existence. Thus, granted the social marginal utility explanation 
for the prices of consumption goods, one may deduce the social 
productivity theory of distribution ; or granted the social produc- 
tivity theory of distribution, the social marginal utility of con- 
sumption goods may be equally readily deduced. 

The ethical inferences. — But another and even more 
serious difficulty attaches to the productivity theory in its 
strictly ethical aspect. Nothing, indeed, so far urged dis- 
turbs its reasoning for its larger and more general economic 
bearing. And nothing will so disturb it, purely as an actual, 
but unprecise account of the entrepreneur process and of the 
entrepreneur purpose. But it remains true that all the 
bidding is entrepreneur bidding and is for entrepreneur 



154 THE ECONOMICS OF ENTERPRISE 

purposes. Therefore the "productivity" that has to do 
with the present analysis is not a productivity according 
to the test of social welfare, but only of private gain — pro- 
ceeds. There is no necessary implication of merit or of 
deserving or of social service. What the entrepreneur can 
pay and will pay has to do solely with the advantages to him 
in his pursuit of gain in terms of price. The wage is earned 
if the work is of a sort to bring an adequate price return to 
the employer. It does not matter whether the process be one 
of adulteration, the compounding of poisons, the writing of 
advertising lies, the drawing up of false affidavits, the cir- 
culating of libels, or even the commission of murder. In 
the strict logic of business, distinctions of this sort do not 
exist, and the terms to express them are mere irrelevancy 
or vituperation. And even when distributive justice may 
be in some sense attained, it must be solely a justice between 
employer and employed. Society is not a participant in 
the distributive equity of competitive business. 

Property and deserving. — And further : even if the rent, 
say, of land, could be shown to be accurately, or in some ap- 
proximate way, the correlative of its productivity in terms of 
price, this would be worlds away from justifying the pay- 
ment of the rent to any individual. Assume it for the time 
being as true that the entrepreneur always attains his ends 
of private gain through ministering to social welfare : assume, 
that is to say, that the land rented by him contributes not 
to the store of alcohol, or of nicotine, or of opium, but to 
the supply of barley for the making of bread. Let the rent 
be paid and let it be neither too much nor too little. But 
paid to whom? The justification of the private ownership 
of land is surely not to stand or to fall with the proof that 
the rent of the land no more than offsets the productive 
service attributable to it. This question of the reasonable- 
ness of the rent concerns solely the tenant as against the 
owner. Take it that the rent is really just : it is entirely 
another question whether it may justly accrue to any private 
individual. So, likewise, with all instruments of produc- 
tion, social capital, and their hires : even were all private 
capital also social capital, and even were the owners of this 



THE DISTRIBUTIVE PROCESS 155 

capital receiving less than the productive contribution of 
their properties, the collectivist program would not be 
appreciably the weaker. It would still be open to the so- 
cialists to denounce private ownership in the means of pro- 
duction — perhaps even the more vigorously that the entre- 
preneurs were able to hire their equipment so cheaply. Not 
the necessity or the nature of rent and interest, but the pri- 
vate receipt of them is the controversial question. There 
is danger in mixing ethics with economic doctrine. 

We have seen that the distributive process involved in 
entrepreneur production is not the only distributive process 
in society, but is the primary and fundamental process ; that 
it is the same process, under another empbasis, that we have 
already studied under cost of production — the outlays in the 
entrepreneur's computation of costs being distributive 
shares from his product ; that as the costs are price items, and 
the product a price item, so equally are the distributive 
shares price items — the distributive process a price process, 
and the distributive shares accruing to the factors merely the 
prices which, by virtue of their gainful significance to the en- 
trepreneurs, the factors have obtained through the bidding of 
the entrepreneurs ; that the process by which these prices are 
attached to the productive factors is the same market process 
of the equating of demand with supply that we have earlier 
analyzed for consumption goods ; that precisely as the de- 
mand price of a bidder for a consumption good does not 
express its utility to him, so the demand price of an entre- 
preneur for a production good does not express its produc- 
tivity to him ; that precisely as the market price of a con- 
sumption good is not commensurate with any but the mar- 
ginal bid for it, so the market price of the production good is 
not commensurate with the paying disposition of any but the 
marginal entrepreneur, and then only at his marginal bid ; 
that as the entrepreneurs are different, so must the signifi- 
cance of the productive good to each be a different signifi- 
cance ; that therefore no such thing as a specific produc- 
tivity is possible; that all productivity must be relative 
precisely as all utility is relative. 

And further : All that the bid, marginal or other, of any 
entrepreneur, marginal or other, can report is the maximum 
price which he can afford to pay for the particular productive 



156 THE ECONOMICS OF ENTERPRISE 

item rather than go without it ; but that this bid cannot ex- 
press the productivity of the item to him, since the factors do 
not function separately but together, the productivity of each 
depending therefore upon the presence of the others; that 
therefore the productivity is never the separable and specific 
productivity of each, but only the joint and inseparable 
productivity of all together ; that thus, with several different 
factors cooperating together to a common end, it is not true 
that the maximum payment of any entrepreneur expresses 
the specific productive power attaching to the factor in ques- 
tion, but only the loss of productivity which would attend 
the withdrawal of the factor — a loss partly due to the re- 
duced efficiency of the other factors. No one, therefore, of 
all the different competing entrepreneurs is capable of isolat- 
ing accurately the productive efficiency of any one factor, or 
of giving to its productivity a precise expression, even for 
his individual purposes and for his own price bid. Still 
less can market price express any separate and isolated 
and specific productivity. No distributive share, therefore, 
accruing to any factor is the precise equivalent of its pro- 
ductive efficiency, but is only the market price of this effi- 
ciency. 

And finally : Even though it were established that precisely 
what a factor produces it gets — that precisely what the en- 
trepreneur pays for it, it, or rather the owner of it, deserves 
from the entrepreneur — all this would fall far short of justi- 
fying competitive distribution — would, indeed, be in the 
main irrelevant to that issue : (1) the motive of the entre- 
preneur is his own gain. Service to him may be a service to 
society, or may be neutral to society, or may be a social dis- 
service. The several distributive shares may be the separate 
remunerations of several associated iniquities, and the deriva- 
tive product may be itself an ultimate and supreme iniquity. 
(2) The actual distribution of each particular product, and 
of products in general, is in large part conditioned on existing 
property rights in the factors of production. The rent of 
land accrues not to the land but to the landlord — the rent 
from the machine or the patent, not to the machine or to the 
patent, but to the owner of it. Therefore to establish the 
equivalence between deserving and receiving, it must first be 
shown that the present property institutions of society are 
righteous in every particular — inheritance, property in land, 
property in franchises, and all the rest. 



THE DISTRIBUTIVE PROCESS 157 

The next chapter will show that the different factors of 
production, for the use of which or for the purchase of which 
the entrepreneur must pay a price, are not three or four, but 
legion ; that consistent classification of the raw materials and 
of the instrumental goods employed in the productive process 
is both purposeless and impossible ; that such outlays as are 
made for raw materials and labor and instrumental goods, 
while cost outlays, are not all of the cost outlays ; that taxes, 
insurance, advertising, and a host of minor items must be in- 
cluded ; that there are still other resistances to be computed 
which yet are not outlays : for example, discomforts under- 
gone, alternative profits foregone, risks incurred ; and that 
in addition to all these costs there must be computed an 
interest charge on the total invested operating fund. 

It will be shown also that all durable possessions for which 
rents are paid or incomes received are equally bases of costs 
when these possessions are employed by the entrepreneur ; 
that, for cost purposes, no distinction is either relevant or 
possible between land and other instrumental goods, or be- 
tween land hires and other hires ; that all durable possessions 
are equally capital, and that, when employed together in the 
productive process, all have the same rank as costs and the 
same bearing though cost on the price of the product ; that 
when not functioning together in the productive process, but 
returning incomes separately to their possessors, all these 
possessions remain capital by the same title of the incomes 
which they command ; that as one's fund of money or of 
purchasing power is capital, so all the income-earning posses- 
sions in which any of the fund is invested must also be capital 
— land equally with all other durable possessions ; that it 
does not matter for the purpose whether one leases his house 
and lot for rent or occupies it, rides his horse or employs it in 
his livery business, eats his chickens or sells them, consumes 
the eggs or markets them ; that the proof that all durable 
possessions earn an income, and are therefore capital, is to be 
found in the fact that the possessor invested his capital funds 
to get them, or pays interest on the purchase price to enjoy 
them, or foregoes, in order to keep them, the capital funds 
which the selling price would bring him ; that just as the 
funds in hand are capital by virtue of their earning power, so 
all goods which absorb the fund because their incomes are 
preferred to the mcome from the fund, must be capital by 
the same test. 



158 THE ECONOMICS OF ENTERPRISE 

Incidentally to establishing the foregoing positions, the 
chapter will discuss the various attempts which have been 
made to distinguish land from those other instrumental goods 
which are admittedly capital, by distinctions (1) of origin, 
(2) of degree of spatial mobility, (3) of degree of specializa- 
tion in employment, (4) of degree of fixity in point of supply, 
(5) of prospect of future modification in supply, (6) of the 
relations of supply to cost outlays, distributive shares in 
general, and prices of products. It will be made clear that 
this untenable distinction found its way into economic 
reasonings through the necessities of the labor theory of 
value, which holds either (1) that the relative prices of prod- 
ucts are determined by the relative amounts of labor ap- 
plied to their production, or (2) that these relative prices are 
determined by the relative outlays for wages incurred in pro- 
duction ; that, for the purposes of either interpretation of the 
labor-cost doctrine, it was necessary that the rent of land be 
somehow distinguished from other rents, and be interpreted 
as a result of price rather than as a cause — as a "price- 
determined," -rather than as a "price-determining," outlay. 



CHAPTER XI 

THE DIFFERENT BASIS OF COSTS AND OF DISTRIBUTIVE SHARES 

The different directions of cost outlay. — Whether one is 
producing for sale or for his own consumption, he commonly 
finds it wise, and perhaps even necessary, to adopt a varied 
direction of investment. For the farmer there are lands, 
buildings, tools, machines, repairs, seed, fertilizer, labor, in- 
surance, taxes, and the like, to be provided for. Together 
with most of the foregoing costs, the manufacturer may have 
outlays to make for raw materials — some of them shoddy 
— for light and heat and ventilation and water service, for 
the expenses of traveling men, for advertising by newspaper 
or circular or billboard ; and there may be also expenditures 
such as royalty payments, or as contributions to the expenses 
of political campaigns. To most of these expenditures 
the merchant will add outlays for the expenses of window 
decorations, of rest rooms, of sumptuous fittings, and of do- 
nations to all sorts of public undertakings. The contractor 
in public work may find himself required, as part of his 
necessary expenses of getting on, to make an occasional settle- 
ment with the city councilman, the political boss, the police- 
man, the inspector. 

And together with his other costs each of these entrepre- 
neurs will include a charge for his own personal services. 
And all of these costs — with the exception of his personal 
remuneration, his profit — will be paid for out of the entre- 
preneur's funds, whether owned or borrowed. All of these 
costs are price outlays in production, for the purpose of achiev- 
ing a price return in product. 

It is then clear that to summarize costs as restricted to 
four classes (1) rent of land, (2) interest on capital, (3) wages, 
and (4) profits, is to render both an incomplete and inaccu- 

159 



160 THE ECONOMICS OF ENTERPRISE 

rate account. There are other costs, as, for example, outlays 
for royalties, taxes, and insurance, — costs that fit awkwardly 
or worse into this fourfold classification. True, these out- 
lays are made out of capital. But this does not differentiate 
them; so are all the other outlays, whether for the wages 
of labor or for the rents of lands and appliances. Indeed, 
even the interest on borrowed funds must be paid out of 
capital. To appeal to the sources of the outlays must avail 
rather to cancel the classifications than to establish them. 

But the account fails in something worse than mere lack 
of exhaustiveness : even for what it covers, it is inexact. 
The main cost categories are indeed four, but they are not 
(1) wages, (2) profits, (3) rent of land, and (4) interest upon 
capital. Rather they are (1) wages, (2) profits, (3) instru- 
ment rents, and (4) interest (time discount), — this last 
being merely a charge for the total capital investment em- 
ployed, computed upon the basis of the dollar-time unit. 

Instruments as absorbing capital; the hires as costs. — 
That is to say, among all his different lines of investment, 
the entrepreneur finds it to his interest to place himself in 
possession of various sorts of tools, machinery, and lands. 
No one of these is more than another an aid to him in his 
gainful undertaking. No one of the outlays imposed upon 
him is more or less than any other the necessary condition 
to his enjoyment of the attendant advantages. Each of 
these outlays equally with every other must be reimbursed 
in the sale price ; else he must decline to maintain his product, 
either restricting, or even abandoning entirely, his contribu- 
tion to the market supply. To buy or hire land calls upon 
him for an investment of capital just as does an investment 
in tools and machines. The return upon his investment 
in land equipment is a remuneration for a capital outlay 
no less than is the return upon machine equipment. 

Is land capital ? — How far, then, and for what purposes, 
is it worth while to divide these equipment goods, these in- 
struments and appliances employed in the productive 
process, into two great classes, (1) land, (2) capital? Why 
is not land merely one kind of capital? or why, if land is 



DIFFERENT BASIS OF COSTS AND OF SHARES 161 

to be distinct from capital, are there not as many different 
classes of land as there are different kinds or grades of land ? 
What, in truth, is land, and what is capital ? What are the 
distinguishing marks or tests? What purpose does the dis- 
tinction serve, once it is accepted? These are neither new 
nor easy questions. In the history of the science, they have 
been prolific of long and bitter controversy. They still 
divide the science into distinctly marked and opposing schools 
of thought. This main and central problem involves a 
host of subordinate issues. The solution will turn out to 
be decisive of not a few important doctrinal corollaries. 

What, then, is capital? — The earlier doctrine, still a 
long way off from general abandonment, distributes the 
sources or causes of wealth into three great classes, called 
factors of production, as follows : (1) labor, the human ele- 
ment, (2) land, the original environmental situation, and 
(3) capital, the productive equipment supplied by man and 
ranking as part of the present environment — differing, how- 
ever, from land in the fact that capital is produced equipment, 
while land is here by original natural bounty. Thus land 
and capital are held as separate divisions of the environ- 
ment, together comprising the aggregate of those things that 
serve as aids or auxiliaries in the productive process. 

The later view — the view which will be presented here 
as the preferable and, indeed, as the only tenable view — 
conceives capital as including all durable and objective sources 
of valuable private income. This latter doctrine declines, 
therefore, to restrict capital to the raw materials, tools, and 
implements employed in the technological, mechanical, 
industrial process of getting goods upon the market. It 
includes, it is true, without demur, all of these things, since 
all are income-gaining to the owner; but, for the same rea- 
son, it includes also land. 

And this later view does not stop here ; many other sources 
of private income are likewise included. Capital is made 
to comprise every durable item of private property, by virtue 
of the fact that every item of durable private property must 
be a source of income to its owner ; else it could not be valu- 
able, and, valueless, could not be property. All possessions, 



162 THE ECONOMICS OF ENTERPRISE 

then, that in any way serve the individual's end are ranked 
as capital by. the sheer title of their productive significance, 
their rendering of income to their owner. 

Thus anything that earns a rent is capital, whether it be 
land or a machine or a pleasure boat or a patent right, or a 
franchise right, or a monopoly — it being essential only 
that the thing in question be something durable that pays. 
Nor does it matter whether it pays by being rented to some- 
one else or by being used by its owner. Equally, in either 
case, it pays. So one's own dwelling house is capital, or 
the pleasure boat that one uses for his own recreation in- 
stead of renting it ; one's horse that one drives, as well as 
the horse in the livery barn ; the furniture that one uses, 
as well as the furniture with which one equips a rented room 
or house. The view here presented holds, then, that capital 
comprises much more than mere industrial equipment, even 
after land is included; that instrument goods are capital 
merely as one sort of source of private gain ; but that the 
ultimate fact that establishes any item of property as capital 
is this fact of rendering an income to the owner — a durable, 
objective source of valuable private income. Rent is therefore 
one manifestation of interest, and whatever item of property, 
land or other, earns it, is thereby capital. It is necessary 
merely that the source of the income have a price ascribed 
to it and that the rent which it earns be stated in terms of a 
percentage upon this price, and forthwith the capital and 
interest relation stands forth clearly. 

The test of capital. — Anything, then, that earns rent or 
interest or that affords valuable service with passing time 
is capital. Capital and interest are correlative terms. The 
objective source of income is capital : the income from capi- 
tal is interest. Thus, a credit against one's neighbor, or a 
bond against the government, is capital merely by the fact 
that either commands an interest income. So of good will, 
patents, trade marks, franchises, monopolies. 

But why so much ado? Does it at all matter? If roses do not 
altogether depend for their smell upon their names, need it signify, 
excepting to avoid the confusion of various tongues, whether any 



DIFFERENT BASIS OF COSTS AND OF SHARES 163 

given thing, or class of things, is to be termed capital ? and particu-^ 
larly, why should irreverent innovators insist upon their especial 
novelties of terminology and upon attacking and reforming the 
dictionary? 

How far the controversy matters must, in large part, await 
an answer in the further development of the discussion. Histori- 
cally, at any rate, although perhaps in strict logic not necessarily, 
this distinction between land and capital has been the controlling 
distinction in economic doctrine. It underlies the question of the 
relation of land rent to cost of production and to market price. 
Thereby it is the central doctrine in the classical theory of distribu- 
tion. It was the controlling doctrine in the labor theory of value. 

How, indeed, did any one ever come to hold that the prices of 
goods are, either as matter of fact or as matter of tendency, propor- 
tional either to the wages or to the labor applied to their production? 
Surely these prices are proportional to the entrepreneur costs 
of production, by virtue of the close attendance of supply upon 
cost. But among these entrepreneur costs there are rents of land, 
as well as hires of machinery or outlays for raw materials. Some 
of the bushels of wheat produced upon good land absorb little 
labor, precisely because the land is so good. Other bushels are more 
and more laboriously produced, as the particular tract of land is harder 
and harder pushed for product, or as the new lands cultivated be- 
come poorer and poorer. Yet all bushels of one quality bear at 
any one time the same price, despite the inequality in the labor 
applied or in the wages paid. And the same thing holds with the 
products of machinery — the poorer the equipment, the more the 
labor ; but there is still one price for the products. If prices were 
to be made proportional to the labor applied or to the wages in- 
vested, something had to be done. 

Capital viewed as stored-up labor-cost. — But this something 
was done. All capital goods — tools, machines, and the like — 
were explained as merely so much stored-up labor, or as the stored- 
up wages paid for it ; the capitalist, as a laborer gone to seed ; and 
thereby the product of capital as indirectly the product of the 
earlier wage-paid labor ; interest being thus mere indirect wages. ^ 
It was implied in this that the interest payments are for mere 
wear-out of the principal invested, and that the sum of all the 
interest payments upon a given investment can normally or regu- 
larly equal only the original capital sum invested in wages ; and 

1 See e.g. Taussig, Principles of Economics, Vol. I, pp. 75, 77. 
(Or infra, p. 373.) 



164 THE ECONOMICS OF ENTERPRISE 

that sometime a given capital investment must cease its career of 
earning interest. But observation and experience combine to de- 
clare all this an error. And there was a still further difficulty — 
a difficulty fully recognized but still not met — of explaining the 
added value going with aging wine, or the growth in price of the 
sapling reaching up to become a tree. But such as it was, the 
view commanded a fairly general acceptance. 

Thus all capital having been traced back to labor, and all in- 
terest reduced to indirect wages, the doctrine that the prices of 
things are proportional to the contained labor — or to the wage 
outlay — was appreciably advanced. There remained only the 
difficulty of eliminating land and its rent from the determination 
of price. This was achieved by declaring that while interest and 
wages are causes of price — are price-determining costs — re at 
is the result of price ; that " corn is not high because rent is paid, 
but rent is paid because corn is high " (Ricardo) ; that prices are 
fixed by the marginal cost of production ; and that this marginal 
cost takes place on land for which no rent is paid, land barely worth 
cultivating without rent, land at the margin of cultivation. 

Margins and marginal cost. — • This view of the case gained some 
support from the fact that the market prices of agricultural prod- 
ucts, like the market prices of all other products, appear to be 
commensurate with the marginal cost of production, rising as it 
rises, and falling as it falls. It was indeed clear — as it is still 
clear — that, as the marginal cost is greater or smaller relatively 
to the costs of other goods, the supply is relatively less or more, 
and that therewith go corresponding changes in the price of the 
product. No difficulty was felt with the problem of causes, or 
with the premise that it is the marginal cost rather than the total 
supply of product that fixes the price, or with the implication 
that the cost of production, inclusive of the rent, is lower upon 
supra-marginal land than upon marginal land, or with the assump- 
tion that the marginal producer is necessarily a producer upon 
rentless land. The rent was declared a surplus of product above 
cost, rather than a payment imposed upon the cultivator by the 
sheer fact that without this payment his cost would be exceptionally 
low, and his margin of surplus, of product above cost, unaccount- 
ably great. 

But note now that this earlier view made it possible to regard 
interest as a cause of price and rent as a result, only upon condition 
of sharply distinguishing ' land from other productive equipment, 
and of establishing, for cost purposes, a clear line of separation 
between the hire of land and the hire of capital goods. And note 



DIFFERENT BASIS OF COSTS AND OF SHARES 165 

again that it was only upon this basis of excluding rent from price- 
determining cost that the proportionality of price, either to labor 
pain alone or to wage costs alone, could maintain even the semblance 
of validity. 

It is therefore imperative to examine the arguments offered in 
support of this distinction between land and the other auxiliaries 
of production, and between the rent of land and other rents, as 
related to cost of production and to market price. 

Natural and artificial instruments. — It must at the outset 
be admitted that even upon the assumption that all the different 
sorts of productive equipment are to be included within the capital 
classification, there still remains the possibility of distributing these 
different instrumental goods into two large classes : (1) those 
originally here as bounties of nature — natural capital — and 
(2) those that are here as additions to the original environment — 
produced facts, artificial capital. It was, then, only the goods 
falling within the second class that the earlier view accepted as 
capital, — the formulation expressing this view running that capi- 
tal is all wealth, other than land, employed in the production of 
further wealth. 

This view evidently conceives capital as a subhead under ma- 
terial wealth, as, in logical consistency, must be true of any view 
that restricts wealth to material goods and that interprets produc- 
tivity as meaning merely a contribution to the bringing forth of 
material product. This earlier view, indeed, regarded capital 
from the point of view of social productivity rather than of private 
gain. Yet somehow, from this social point of view, it excluded 
from the notion of capital the land share of the social equipment for 
productive purposes. The economic process was conceived as 
a strictly industrial, technological, and mechanical process — not 
primarily the creation of values, but the creation of things. So 
the different factors of production fell into classes strictly deter- 
mined by their technological relations to a strictly mechanical 
process. The mechanical, concrete, industrial equipment at the 
disposal of human energy — human energy being also mechani- 
cally regarded — was divided into two great classes, i.e. land 
equipment and equipment other than land ; corresponding in gen- 
eral to the distinction between the extractive and the non-extractive 
types of industry. 

Functions versus origins. — Now while this classification by 
origins must be admitted as possible, — if only the origins were 
ascertainable, and if at the same time it could make the slightest 



166 THE ECONOMICS OF ENTERPRISE 

difference to any man what these origins were or were not — the 
difficulty still presents itself that the mechanical and industrial 
functions of productive factors have not the shghtest relation to 
this matter of origins. Not the extractive industries alone, but all 
industries, employ land, precisely as all industries under present 
conditions make use of equipment other than land. Nor even as 
a distinction of degree does this classification by origins parallel 
any distinction relevant to technology. Some of the extractive 
industries, mining, for example, are pronouncedly, even prevailingly, 
capital-using in their technique ; even the most simple extractive 
industries make appreciable use of instruments other than land. 
It is, however, none the less true that not merely food and raw 
material, but building sites, standing room, air, climate, scenery, 
neighborhood, and so forth, are markedly and emphatically of land 
character or of land origin. And it is equally unquestionable that 
capital goods achieve some things not attainable through any 
possible substitute, precisely as other commodities are in a peculiar 
degree, or exclusively, dependent on labor. You cannot have 
timber from labor or capital ; neither from land nor capital will 
you get a skirt dance ; and if you desire a certain peculiar quality 
of screeching, you must resort to a phonograph or to a calliope 
as against any form of land or labor. 

But note once again how illogical in its technology all of this is ; 
for while it is true that labor and capital, when denied recourse 
to land in the unpriced and purely concrete and physical sense, 
will yield no timber, it is at the same time true that they will give 
timber plentifully enough if strictly limited in their application 
to valueless land, that is, if confined to what, in the economic and 
value sense, is no-land. And some day the technology of timber 
production may make of timber a laboratory product. 

Technology as test. — AnJ it is all the while to be remembered 
that these technological differences and specializations, while of 
unquestionable actuality, are, in fact, as marked between one item 
of land and another, or between one item of capital goods and 
another, or between one laborer and another, as between capital 
goods and labor, labor and land, or land and capital. For market 
purposes agricultural machinery is more closely akin to wheat land 
than to machinery for producing watches or chronometers ; cotton 
lands are, from the same point of view, more hke sheep than like 
timber lands or iron lands or wheat lands; in point of products, 
violin and sea are not more unlike than virtuoso and sailor, or than 
prima donna and stoker. 

In truth, also, if productive factors are to be distinguished accord- 



DIFFERENT BASIS OF COSTS AND OF SHARES 167 

ing to technological considerations, not two or three but countless 
categories of productive factors will have to be recognized.^ 

Origins as test. — But even were the question of origins relevant 
to the technology of the case, the distinction would remain entirely 
hopeless of application. It leads nowhere when attempt is made 
to apply it. From among all the changes of all the ages, who can 
undertake to tell what environmental changes have been due to envi- 
ronmental processes as against human agencies? What part, for 
instance, of the fertility or the infertility of the land has been due 
to its treatment at the hands of man, to his fertilizings, his exhaust- 
ings, and his denudings ? What part to fostering or wasting winds, 
to corals, to birds, to bugs, to worms, to microbes? What share 
of the value of the house traces back to the timber values of the 
natural forest, and what part to industrial processes ? Even with 
the case of machinery, the typical form of capital, human wisdom 
would fall far short of distributing the final value between the origi- 
nal ore value as against the labor value, the coal value, and the tim- 
ber value. Nor, for any one of these various shares, would it be 
possible to determine how far land rents, as expressed in warehouse 
and transportation charges, have counted in the case. And finally, 
if any one could accredit either the land or the warehouse to its 
particular origins, is it to be supposed that, as shares in the total 
hire of the machine, the remunerations would forthwith, either 
in the collective or in the competitive reckoning, take on a new 
relation to the cost of the product or to its price ? 

But in the larger social, historical, and philosophical view, the 
distinction remained still valid — only that it was not valid for 
any purposes of competitive entrepreneur activity, or for any 
problems of market value and price, or for the analysis of the com- 

1 " The grouping of the factors of production into the three classes, 
labor, land, and capital, is by no means final. There are various 
kinds of labor, of land, and of capital. Two different kinds of 
labor may be performing functions which differ almost as widely 
as those performed by labor and capital, or by labor and land. 
The work of a bookkeeper differs as widely from that of a ditch 
digger, as that of a ditch digger does from that of a steam shovel. 
Therefore, the same reasons which favor the separation of labor 
and capital, in order that they may be treated as distinct factors, 
will also favor the separation of one kind of labor from another, 
of one kind of capital from another, and of one kind of land from 
another." Thomas Nixon Carver, The Distribution of Wealth, 
New York, 1908, p. 85. 



168 THE ECONOMICS OF ENTERPRISE 

petitive distributive process. It was, however, unfortunately 
assumed, and still is commonly assumed, that what is true for social 
purposes holds also for the competitive analysis. 

But other arguments were, and still are, urged in support of the 
distinction between land and other equipment goods. The following 
is a summary of the entire position as presented by one of its de- 
fenders. " In many essential respects land and capital take dif- 
ferent ways. (1) The former is immovable ; the latter, for the most 
part, movable. (2) The former is a gift of nature; the latter, 
a result of labor. (3) The former cannot be increased, the latter 
can be. (4) The landowner has a social and economical position 
essentially different from that of the capitahst ; property in land 
is j ustified on essentially different grounds from property in movables. 

(5) Land is the special object of a kind of production which is 
economically distinguished by many important peculiarities. 

(6) Income from land, while subject to many laws in common 
with income from capital, obeys many distinct laws of its own — 
land rent, for instance, rising with economical development, while 
interest falls. On all these considerations, the number of which 
might easily be increased, it is most convenient to keep land quite 
distinct from the other kinds of productive wealth." i 

(1) As to the immovability of land : and the movability of capital : 
Even were the immovability of land a fact, it would be irrelevant. 
But it is not even a fact, otherwise than as a spatial or geographical 
matter, and not altogether true then. Many of the improvements 
made upon land, or incorporated with it, are equally as irremovable 
as the land itself : wells once dug, improvements in mines or upon 
waterfalls, are prone to stay where placed ; so, also, are office- 
buildings. On the other hand, by carting loam or by grading, by 
the filling of swamps or water fronts or marshes, to say nothing 
of the action of wind and tide and wave, the seeming fixity of land 
is appreciably disturbed. And the mere question of immovability 
as a simple matter of superficies or of extension is not to the point : 
for in its aspect of effectiveness for production, its technological 
significance, land can be worn out, displaced, or renewed as readily 
as other instrumental goods, and sometimes much more quickly. 
Most New England land cannot be cropped beyond five or six 
years without renewal through fertilizers, unless upon terms of the 
land becoming fit only for pasture. A linotype machine, on the 
contrary, has a life of several decades without serious need of 
repair. 

1 EuGEN v. Bohm-Bawerk, Positive Theory of Capital, p. 55. 



DIFFERENT BASIS OF COSTS AND OF SHARES 169 

Nor is the specialization of the instrument to the production of 
any one product more marked with land than with machinery. 
Some machinery — much machinery — is serviceable for only 
one purpose or in only one line of production, and is only at great, 
or even at entire, loss to be moved to another plant, to say nothing 
of employed in another industry. And this is true in varying 
degrees of all the different forms and conditions of capital goods 
of land and of labor. And practically all lands and all other in- 
strumental goods are mobile for the purposes of the individual 
owner in the sense that they can be realized on in the market. This 
last, however, it must be admitted, is not a technological mobility. 

(2) Origins. — That land in its original condition is or was a 
gift of nature must, as we have seen, be taken as unquestioned: 
but so equally of diamonds and timber and coal and iron ; and in 
any case the point is not relevant to a technological classification 
of productive factors. 

(3) Terms of supply. — There is more in the notion of the relative 
fixity or inelasticity of the land supply, as a question not of what 
actually is, but of what is likely to be, — the economic prospect 
socially viewed. But none the less is the amount of machinery at 
any one time as fixed and definite a fact as the amount of land; 
and there is always enough of either so that any individual can 
always get all that he has occasion for. He has only to pay the 
price or the rent. For any one individual or for any one productive 
undertaking, there is no limit upon the supply. It is then irrelevant 
to the individual interests that the supply, either of machines or 
of land, is, at any given time and as an aggregate, a limited supply. 
And were it relevant, the effect of limitation holds equally for 
machines as for lands. At any given time there is what there is 
of either, no matter how either may later change. Note also that 
the limitation applies in the same degree and in the same sense for 
the supply of human beings and their labor. This fact, however, 
has never recommended itself as justifying the exclusion of wages 
from cost. 

But, even if this prospective scarcity or dearth of land could be 
accepted as a certainty, is there good ground for asserting that the 
rent which the land bears to-day is any the less a cost to-day ? If 
it were proved, or otherwise accepted, that labor is likely to get 
more scarce, would this suffice to exclude present-day wage outlays 
from present-day costs? Must every basis of cost promise with 
certainty to function as a still greater cost in the future, in order 
that it function as a cost at all now? Must it be twice a cost in 
order to be once a cost? 



170 THE ECONOMICS OF ENTERPRISE 

But, after all, it must be noted of this prospective land scarcity 
(1) that it is all a mere matter of prophecy, and (2) that instead 
of approaching, as is ordinarily assumed, to a moral certainty, it 
is not much better than conjecture. The past three or four hundred 
years appear to have presented the phenomenon of increasing land 
plenty relatively to labor and capital. With the forces of explora- 
tion and of developing transportation, new supplies of land have 
far outrun the increase of population. Elasticity has, indeed, in 
a surpassing degree — probably, it is true, hardly again to be 
duplicated — characterized the supply of land. Capital mean- 
while appears not to have increased beyond the expansion of the 
demand afforded by the increase in the supply of land and the growth 
of population ; since interest appears to have been, in some countries 
of Europe, as low one hundred and fifty years ago as to-day ; then, 
with advancing capitalistic opportunities, to have risen ; later, 
with the progressive exhaustion of the new opportunities offered 
by increasing population and enlarging land supply, to have fallen. 
Thus, while a future shortage in the supply of land looks probable, 
it is not at all certain. For aught we know to the contrary, chem- 
istry may sometime solve the problem of food production without 
recourse to agricultural methods. The secret once learned, the 
nitrogen in the air of the back yard and the ton of coal in the bin 
may furnish food for an ordinary family for a year. And it is to 
be added that in the future, as in the past, much will be accom- 
plished by improving transportation to mitigate, if not to prevent, 
the conjectural dearth of land. 

And even admitting the general vahdity of this forecast of the 
inelasticity of the land supply — as probably, indeed, we ought — 
it is the more important to recognize that expanding knowledge 
(development in the human factor of production), or improving 
transportation (development in both the human and the capital 
factors), may function technologically as substitute for land. 
Bettering transportation is more land ; true, geographically speak- 
ing, land is not made ; but accessibility is made, and upon an enor- 
mous scale; land sufficiency, like land value, is in large degree 
positional. 

But further: if, as technological facts, these probabiUties of 
change are taken to justify, for purposes of economic theory, 
a separate category of land wealth as against other wealth, 
there is forthwith to be undertaken an indefinitely large task of 
further classification or of subclassification. For while grain 
land may be becoming seriously scant, range lands, or champagne 
lands, or mines, or fisheries may become more plentiful or more 



DIFFERENT BASIS OF COSTS AND OF SHARES 171 

accessible. So, also, while the provision of wooden implements is 
becoming increasingly inadequate, the different sorts of machinery 
and tools of metallic material may be growing progressively cheap ; 
and meanwhile electrical apparatus is likely to abound. And 
similarly for the human factor ; as one kind of man, say the athlete 
or the unskilled workman, is becoming relatively more scarce, 
doctors of philosophy may more than generously multiply. 

(4) That the land owner has a peculiar social or political standing 
is matter neither of economics nor of technology, but solely of ethics 
or of law or of politics — or perhaps of sociology — unless, indeed, 
these social and political advantages are themselves ranked as 
valuable economic incomes. It may well be true, however, that 
the distinction between earned and unearned wealth, between wealth 
socially created and wealth individually created, needs to be drawn 
as bearing upon the justifiable limitations upon private property 
or upon the direction in which tax reform may be wisely sought. 
But the distinction between natural and artificial wealth would 
suffice for this purpose. When that which ought not to be owned 
has come to be owned, it is not the less capital by virtue of the 
ethical facts; nor do economic classifications stand or fall with 
the social appraisals which these facts may invite. 

(5) Diminishing returns. — The point as made by Bohm- 
Bawerk — that land as a productive factor is peculiar in important 
respects — is difficult of discussion. Perhaps the so-called law 
of diminishing returns is especially in mind — of which there is 
much more to be said later. Stated in the large, this law may be 
taken to assert that any given piece of land cannot be harder and 
harder pushed for product, excepting upon terms of less and less 
generous response. Surely there could be no such thing as land 
rent, were there no limit upon the supply of land ; but this is merely 
to say that all value, whether for land or for machines, or for shoes, 
or for hats, exists only as dependent upon some degree of scarcity. 

And surely, if, with any given piece of land, increased expenditure 
upon the land were not attended with a constantly falling com- 
pensation both in volume and in value, there could be no land 
scarcity and no land value. But this is equally true of mowing 
machines or horse rakes. So, if one pound of phosphate would 
suffice to fertilize a continent of land, phosphate would be safe 
from ever becoming dear in price ; or if one hour of labor would 
do all the work to be done, labor and its products could not be 
rare. And surely if only the non-land expenses of production be 
doubled, there must result less than a doubled product : the pro- 
ductive undertaking as a whole has not doubled. If this fact is 



172 THE ECONOMICS OF ENTERPRISE 

all that is intended to be formulated under the competitive rendering 
of the law of diminishing returns, the law must be pronounced to 
be axiomatically valid, but vahd equally for capital instruments 
and for labor agents in all their various combinations. Each case 
under the law stands as mere illustration of the fact that if only 
a part of the productive factoi's are increased, the product will 
not respond with the same increase as if all the factors are doubled. 

But the law is often formulated to assert that if the application 
of expense to the land be doubled, but the land not doubled, the 
extra returns will fail of proportion to the increased expense. And 
this formulation of the law is also valid, even if not quite axiomatic ; 
proper proportions of land value with other values must be main- 
tained, or the returns will be a disappointment ; a bad combination 
gives bad results. But in this there is nothing peculiar to land. 

(6) Peculiar laws. — It cannot be admitted that land rent has 
its own distinct general laws. Many forces in economic develop- 
ment tend, as we have seen, to reduce land rents, as well as macliine 
rents. Nor is it true that investments in land earn lower rates 
of interest than other investments, if all the different incomes are 
allowed for, or that land properties arrive at a market value by 
processes different from other properties. 

What capital is. — It will shortly be made clear that the 
process by which the market prices of different lands are 
derived from their earning powers is the very same process 
which applies to all other durable properties. Tested, then, 
by the ability to earn interest upon the invested funds, land 
is capital. Tested by the fact that its market price is the 
capitalized present worth of its future incomes, it is capital. 
Tested by the fact that its possession is desired for the 
incomes which it controls, it is capital, just as is any machine 
or other implement of production. Tested by the similarity 
of a town lot to a town residence, as each a durable consump- 
tion good, the lot is capital. 

The test of capital is, then, in the rendering of income 
with passing time. Any durable objective source of valuable 
private income is to be recognized as capital : the phe- 
nomena of interest, of capitalization, and of a deriva- 
tive present value are present. Land is capital — agricul- 
tural land, or factory land, or the sites of farmhouses, or of 



DIFFERENT BASIS OF COSTS AND OF SHARES 173 

country mansions, or of city palaces, or of city tenement 
houses, or of city shops — all lands, rendering a valuable 
income, and coming thereby to command a price. 

The test of capital is, therefore, not in the fact that it is an 
intermediate in some mechanical process, or that its results 
are finally incorporated in some addition to the sum of tan- 
gible material things ; else ice stored in winter for summer 
use, or fancy cheeses taking on new delicacies of mouldy 
flavor, or meat warehoused for salt or pickle, or grain in the 
elevator, or fruit or eggs or poultry in cold storage — 
would all fall out of the capital category. Nor if the test 
were in the materiality of the product could a bus, or a pas- 
senger coach, or an excursion boat be ranked as capital. 

Nor is the test better found in the wholesomeness of the 
consumption, or in some other possible social service at- 
tendant upon the thing or upon its product. It suffices 
merely that the property earn an income, or that its product 
command a price. Whether the stale cheese is dietetically 
better than the fresh, the corned beef or the ham more di- 
gestible than fresh beef or pork, the VN^hisky more whole- 
some than the rye, or the beer than the barley — is not to 
the purpose. If whisky is wealth, distilleries must be 
capital. Opium being wealth, and opium lands commanding 
rents, opium lands are capital. Corsets sell, therefore corset 
factories are capital. 

And if the test is neither in the materiality nor the whole- 
someness of the product, it must be equally clear that it 
cannot be in the materiality of the property on which the 
product is conditioned. The differences in the prices of 
dwelling sites are mostly due to differences of position, and 
the incomes are mostly such intangible facts as space, view, 
convenience, neighborhood associations, and social prestige. 
Equally well, also, may the sources of the income be intan- 
gible — patents, franchises, monopolies, good will, political 
privilege, police favor. 

Where discount is, capital is. — But this is not all of the 
doctrine here to be presented : the capital category must 
obviously be extended so far as to comprise all durable 



174 THE ECONOMICS OF ENTERPRISE 

items of property — all things, that manifest the phenom- 
enon of interest — or, to put it still more accurately, all 
things to which the principle of time perspective applies 
in the process of arriving at a present worth. Capital 
includes, that is to say, all possessions that furnish to their 
possessor an income with passing time — all things that 
require for the rendering of their service an interval of 
time so far appreciable that some of these services suffer in 
present worth through the effect of their futurity.^ One's 
own home or one's carriage yields him a succession of valu- 
able services : that is why he bought it and paid cash for 
it, or still pays interest on the purchase price. All goods also 
that take time in which to achieve their value, to grow into 
a tree, to ripen a crop, to mature a coupon, fall under this 
principle and are thereby capital. Likewise, if, with the 
lapse of time, the value increases, whether by one sheep 
growing into two, or one small sheep into one large one, or 
one superfluous sheep to a famine-time sheep, the thing which 
is the basis of increase is, by that very fact, established to 
be capital. So long as, with passing time, the objective 
good so changes its utility in relation to its possessor, or 
so long as its possessor so changes in needs and desires or 
in provisionment as to modify the utility relation between 
the good and himself, there is room for the rendering of an 
income, and of an income susceptible of a discount into a 
present worth. And more than this : as the time draws 
nearer at which a good can render its service, there may be, 



^ To remember the immediate past and to anticipate the im- 
mediate future is the most striking function of consciousness. 
Indeed, what we call the present instant is something that hardly 
exists except in theory. . . . Practically what we call our present 
is something that has a certain length or breadth of duration, and 
is composed of two halves, one being our immediate past, the other 
our immediate future. What we feel ourselves to be at any given 
moment is what we were just before and what we are just about 
to be : we recline on our past and incline toward our future, and 
that reclining and inclining seem to be the very essence of our 
consciousness. So that consciousness is, above all, a hyphen, 
a tie between past and futm-e. — Henri Bergson, " Life and 
Consciousness," The Hibhert Journal, October, 1911. 



DIFFERENT BASIS OF COSTS AND OF SHARES 175 

by this very fact, an increase in its present worth. Con- 
versely, there commonly goes with remoteness a diminution 
of present worth. This fact of futurity manifests itself 
when viewed from the beginning of the period, as a diminu- 
tion, as a discount ; the same period, when looked back upon 
as past, interprets the same fact as a growth in value. Thus 
all goods that have a time dimension, all durable goods, mani- 
fest the interest, or time discount, phenomenon ; all, there- 
fore, are capital. Capital is wealth in its time dimension : 
value in time. All instrumental goods, land or other, are 
evidently capital. And if the land on which one pastures 
his flocks is capital, so is his yard or his park wherein he 
pastures himself. And if land used for building purposes 
is capital, then all consumption goods which are in any part 
postponed in use must be included ; all are held because an 
advantage or increment lies with postponement. The very 
fact of postponement proves that the present worth of the 
postponed use outranks in estimation the present use. Even 
with goods deteriorating or decaying, physically or chemi- 
cally considered, the advantage in present worth is on the 
side of delay, or they would not be held. It is not conclu- 
sive that some of the apples stored in the cellar will rot, or 
that the ice in the shed will lose half its weight before sum- 
mer. The present worth of the half of the ice, computed 
upon the basis of the summer value, is greater than the 
worth of the whole for present consumption. 

How the issue matters. — Most economists still hold that 
the rent of land has no part, as cost, in determining the sup- 
ply and the price of the product. It is, indeed, mainly for 
this reason that they emphasize the distinction between land 
and other instrumental goods and deny that land is capital. 
But that, in competitive affairs, the business man's total 
investment, inclusive of land and franchises and patents, 
is his business capital, and that the important fact for cost 
and for the fixation of price is the fact of outlay and not 
the particular direction of this outlay, may perhaps be made 
clearer by observing the different ways in which producers 
in the same line of production go about to achieve precisely 



176 THE ECONOMICS OF ENTERPRISE 

similar ends. Of six farmers, with substantially similar 
farms and inheriting or borrowing an equal fund of purchas- 
ing power, one will buy more land, another more machinery, 
a third will hire more labor, a fourth will buy more draft 
cattle, a fifth will increase his herds, a sixth will enlarge and 
improve his sheds and barns ; but all will, in essential simi- 
larity, be devising ways of most gainfully putting product 
upon the market. True, there would be room enough here, 
were it to the purpose, for technological distinctions between 
the various factors of production, but it is clearly not to the 
purpose. No one of these gain-seeking outlays is any more 
or any less a cost than any other — no one of the durable ob- 
jects purchased less an item of capital than any other. 

We may, then, take it as established that, in any competi- 
tive sense, the productivity of labor or of wealth is purely a 
question of controlling income for an individual ; that all 
durable property is a durable source of income, commands 
therefore a price, and is capital in the degree of its price ; that, 
even mechanically viewed, the factors of production are not 
three or four, but legion ; that the hires of these for produc- 
tive purposes are all equally costs, and are costs by the same 
test and title ; that there are many cost outlays and cost 
charges other than those involved in the mere hiring or buying 
of material, concrete, industrial equipment ; and that, as one 
out of a large number of costs, must be reckoned an interest 
charge upon the invested fund or funds. The invested capi- 
tal fund as an aggregate is therefore capital. Every source 
of income in which any part of this fund is invested is capital. 
Every outlay in production is a cost. Every cost is to its 
recipient a distributive share. Rent and interest are equally 
incomes from capital, are, as costs of production, indistin- 
guishable in their relation to price, and are distributive shares 
of the same rank and by the same title. 

The next chapter will devote itself to reenforcing these con- 
clusions, with especial reference to the relation of the rent of 
land to the costs of production and the prices of goods. It 
will be shown that the rent of land is a cost like any other, 
and has the same relation to price. The existence of any 
factor of production for which a rent or hire is paid is ob- 
viously not a reason why the product is scarce or the price 



DIFFERENT BASIS OF COSTS AND OF SHARES 177 

high. The more of the factor, the more of its product and the 
lower the price. The rent of the land, or the hire of any other 
factor, is merely the competitive expression of the scarcity 
of the factor. Rent is paid to the landowner, and is a cost to 
the entrepreneur, because of the scarcity of the land. Any 
factor that commands a rent commands it not because there 
is so much of the factor, but because there is so little of it ; 
not what there is of it, but what there is not of it, explains the 
rent of it. Every cost outlay is, then, merely the guise in 
which, in a competitive society, the scarcity of the factor 
presents itself to the entrepreneur. Desiring to control the 
price product of the factor, the entrepreneur is compelled to 
pay a rent as the condition on which he may control the 
factor, and, through the factor, may control the product of 
the factor. Cost, therefore, is the competitive expression of 
the limited supply of the factor. Thus all rents or hires of 
productive factors — ■ as all pointing back to the ultimate fact 
of the scarcity of the factors — are all equally costs in the 
entrepreneur computation. So far, then, as the distinction 
between land and capital concerns itself with the attempt to 
distinguish land rent from other rents in relation to cost of 
production and to price, the distinction has no basis. 



>/ 



CHAPTER XII 

RENTS OF INSTRUMENTS AS COSTS : LAND RENT AND 
COST 

Substituted costs in agriculture. — In agricultural pro- 
duction, as in almost all other lines of production, there is 
need, as has already been noted, for a considerable variety 
of equipment, land and other. In some measure, also, one 
sort of equipment may be used as substitute for another. 
This principle of substitution is manifest in a great variety 
of applications. Just as the original qualities of the soil 
may be exhausted by withholding upkeep, so they may be 
replaced and renewed by capital expense ; the poorest of land 
may be made into good land, if only sufficient capital expense 
be applied, — the sole question being whether it will pay. 
And this question in turn depends upon the selling price of 
the products. And precisely as machinery may take the 
place of labor, or labor of machinery, so more labor may 
often be hired, instead of renting more land or purchasing 
more machinery ; or, again, more expense for equipment 
may be applied to a given holding of land, instead of hiring 
more labor or renting more land. 

This is constantly illustrated in actual farming ; one farmer 
rents more land or better land, and thus, through his larger 
rent outlay, excuses himself from correspondingly large 
outlays for machinery or fertilizers or labor ; another farmer 
finds it to his advantage to restrict himself in rent outlays 
and to extend his investment in the direction of capital goods 
or labor. All these outlays are investments of capital. 

But that at the margin this principle of substitution holds, 
and even that extending transportation or improvements in 
agricultural technique may have the effect either to increase 
the land supply or to make more effective the existing supply, 
does not prove that the principle of substitution is indefi- 

178 



LAND RENT AND COST 179 

nitely applicable at no matter how distant removes from the 
margin of substitution ; for were such the truth, there could 
be nowhere any disadvantage from an increase of capital 
expense upon a fixed supply of land, or any loss from twenty 
laborers working with one loom, or any reason why indefinite 
wagons should not dispense with the need of horses or drivers. 

Complementarity versus substitution. — For it is clear 
that in the main the relation between the different productioux 
goods is one of complementarity and interdependence rather ) 
than of the indefinite possibility of substitution. More men' 
and more machinery may make call for more land rather 
than for less, or for the old land at a higher rate of rental. 
Machinery does not displace men indefinitely, but, under 
stable conditions of technique, calls instead for men to fashion 
or to tend ; wagons furnish demand for drivers, ships for 
sailors, horses for drivers, drivers for wagons, and so on with- 
out limit. 

Stopping to note, however, that there is in these facts 
no warrant for the threefold division of productive factors, 
since it is equally true that bricklayers furnish a demand for 
hod-carriers, carpenters for masons, wagons for horses, sail- 
ors for cooks, engines for cars, rails for ties, meadow land for 
pasture, and both of these last for timber lands, and so on 
indefinitely, we are nevertheless held to admit that the sub- 
stitution of labor or machinery for land cannot go on in- 
definitely in agriculture. A point always is reached at which \ 
more intensive cultivation gives more and more meager/ 
returns in product. The difficulty is ultimately spatial.\\ 
It is impossible to compress agricultural or building or cli- 
matic or scenic aspects of land into ever smaller compass and 
without limit of disadvantage. With all vegetable life a 
limited space means limited supplies of food, of light, of air, 
and of moisture. There is, therefore, an elastic, but never- 
theless a real, limit to the crop which may be derived from 
any one acre of land. Otherwise, in truth, there could never 
be any possibility of land shortage, and that inevitable 
derivative of land shortage, crop shortage, and therewith 
high prices of products, and therewith high rent upon land. 
Were it, that is to say, always possible to double the crop by 



180 THE ECONOMICS OF ENTERPRISE 

merely doubling the non-rent expenses of production or even 
by doubling, in non-land directions, the total expense, land 
scarcity could never set in, or land rents emerge as derivative 
from this scarcity. 

Population, land, and product. — But with our present 
knowledge of the sources of food and with our present com- 
mand of the technique of agriculture, it is clear enough that 
increasing population must tend to exert an ever harder 
and harder pressure upon the resources of the land. Thus, 
from a social point of view, and purely as a forecast of human 
welfare, Malthus and his successors long since made it clear 
that, in the land aspect, the prospects of the human race 
are discouraging. With increasing numbers, human beings 
must find the food problem progressively a more serious 
problem ; in its effect upon per capita production of commod- 
ities, overcrowded land is the same thing as poor land. 

Population — rent and wages. — These same facts, looked 
at in their competitive and price significance, have larger 
meanings than Malthus saw, or was interested to see. They 
mean, namely, that with an increasing population, and an 
increasing relative scarcity of the products especially de- 
rived from land, and with increasing relative plenty of the 
products which are mainly derived from labor or from in- 
struments of production other than land, the relative prices 
of agricultural products must move upward, and that rent 
upon land must gradually and constantly advance. And 
these same facts, treated in their distributive emphasis, 
would assert that as, with increasing population, there falls 
out, per capita, a smaller product in society to be divided, 
there goes to the landlords a larger and larger proportion of 
this more and more tragically inadequate total. The land- 
lords gain by the general ill-fortune. Those classes disin- 
herited of land are doomed to a double and compounded 
pressure of adversity. The land famine smites them with 
both edges of its sword. 

When a discussion comes to busy itself mostly with conjecture 
and prophecy, the optimists are prompt to claim their innings. 
Surely other things remaining the same, all these disasters would 



LAND RENT AND COST 181 

attach. But other things will not remain the same ; for if there 
is a law of diminishing return, there is also what is sometimes inac- 
curately called the law of increasing return. If, with relative land 
famine, a larger share of the productive energies at human disposal 
must be appUed to the land, it may also be true that, with improving 
methods and processes in manufactures, humanity can spare for the 
land a larger share of its productive energies. Who knows that 
progress in one direction may not more than make good the deficit 
in the other direction ? 

Rent and the methods of culture. — Strictly, however, our busi- 
ness is not with prophecy, or with history, or with social appraisals, 
but with the explanation of the present payment of rent by com- 
peting operators, and with the relation of land and land rent to the 
prices of products. Fortunately, those aspects of the land question 
already examined furnish us with some principles and analyses 
serviceable in the problem of current competitive price. 

Precisely as society in the aggregate is disadvantaged in 
its supplies of products by a bad proportion between its 
different factors of production, so the individual farmer 
finds that his land equipment must be in proper proportion 
to his other equipment. When land is dear and rents are 
high, the farmer is likely to cultivate a smaller area, and to 
employ more labor and machines and fertilizers per acre 
cultivated, — that is, farming becomes more intensive. 

This same fact may be put in another way : The rents and the 
prices of land could not be high were the land supply not limited, , 
the supply of products thereby restricted, and, therefore, the prices 
of products high. But when land is to be had only at high cost, the 
number of acres cultivated per man must be small, and the applica- 
tion of machines and fertilizers relatively great. Land rents are so 
high as to prohibit a lavish use of it ; it must be economized ; so the 
non-land factors of production are called upon to serve in larger 
measure instead of further land. A less intensive method of culti- 
vation would involve a bad proportion of factors — too much land 
in view of its rent. 

But where land is plenty and cheap, extensive cultivation 
gives the better results. The farmer uses more land pre- 
cisely because it is cheap. The generous employment of it 
offers the less expensive method of putting the product 



182 THE ECONOMICS OF ENTERPRISE 

upon the market. Farms average much larger in America 
than in Europe, and in Europe than in Japan — in Japan 
2| acres. 

And not merely this : as prices of products are greater 
and rents are higher, the farmer finds it to his advantage to 
cultivate lands which, at a lower price for his products, he 
could not wisely cultivate ; with the earher low prices, the 
product left no surplus above the non-rent costs of produc- . 
tion. Now with higher prices, a surplus is possible, and 
the land is, worth paying rent for. It may, indeed, be better 
to pay the rent for this poor land than to hire a better grade 
of land with its correspondingly smaller outlays for labor and 
fertilizers and machinery. 

But even so, these higher prices that are making it gain- 
ful to open up new lands, are also making gainful the more 
and more intensive cultivation of the better grades of land. 
Thus, there are two sorts of marginal cultivation of land, 
(1) at the extensive margin — upon lands barely indemni- 
fying in their product the non-rent expenses of cultivation ; 
and (2) at the intensive margin — • the point at which, upon 
supra-marginal lands, further cost is barely indemnified in 
the price of the further product. 

Price and marginal production. — The market price of 
any product tends evidently to be commensurate with the 
cost of production at either of these margins, and commen- 
surate also at the same time with the marginal costs of 

\ production of those other items of product where rent 

I enters into the cost. Th? market price tends indeed to be 
commensurate with marginal costs of production wherever 
these costs take place. This, however, is not at all to say 
that the marginal cost of production determines the price; 
as well declare — and probably better — that it is the price 
that determines the marginal cost. Neither statement, how- 

, ever, is safe; it is the total supply over against the total 

\\ demand that determines the price. 

' ' All rents equally costs. — It should now be evident that 
rents are attached to lands, through the bidding of entre- 
preneur cultivators, upon precisely the same basis, and for 
the same reason, and by the same process, that wages are 



LAND RENT AND COST 183 

paid for labor, or that other rents are paid for machinery; 
and that market prices are attached to land upon pre- 
cisely the same basis, and for the same reasons, and by the 
same processes, as market prices upon machinery. Good 
lands command higher rents than poorer lands, just as better 
laborers get higher wages than poorer laborers. This is 
merely one further illustration of the principle that any 
means of gain is paid for because of the additional return 
that it promises. Land rents represent the differential in 
market rental of each grade or piece of land above the land 
barely worth using without rent. But so is every wage 
or other hire nothing more or other than this same differential 
above nothing. 

And note again that, as has before been sufficiently shown, it is 
one thing to say that all these different hires are paid because of the 
promise of gainful service to the entrepreneur in placing his results 
upon the market, and another thing to say that these hires are paid 
as the precise equivalent of the contribution to the market price of 
the result. And it is still another — and an even less justifiable 
tiling — to say that the service for the price gain of the employer is 
necessarily a service to society. 

Ricardian doctrine examined. — The foregoing analysis 
coincides in the main with the generally accepted theory of 
land rent — ^the Ricardian theory — so far as the amount 
of 'he rent payment and the method of its determination are 
coniterned. The points of divergence lie further on : in 
ulie denial that there is anything in the theory of the deter- 
mination of rent that does not equally apply to the remunera- 
tion of all other means of achieving gain ; in the insistence 
that machines receive rent and that labor receives wages 
upoii the same basis of principle on which rent is awarded 
to had; that the relation of land rent to cost of pro- 
duction, to supply, and to market price, is in no respect 
different from the relation of machine rents and wages to 
cost, to supply, and to price ; that there are intensive and 
extensive machine margins precisely as there are intensive 
and extensive land margins ; that marginality in cost of pro- 
duction is a category of persons, and of things only as related 



184 THE ECONOMICS OF ENTERPRISE 

to persons ; that the marginal producer may as well be on 
good land at high rent as on poor land at no rent ; that the 
costs are neither lower nor higher by virtue of the land being 
better or poorer ; that rent is simply a cost that is submitted 
to as the compensation competitively imposed for the better- 
ness of the better lands ; and that it is precisely this fact of 
rent that cancels the inequalities in cost that otherwise must 
attend the differences among lands in their serviceability 
for gain. 

Fertility and position. — In the main, the Ricardian theory con- 
cerns itself with agricultural and not with urban rents : With agri- 
cultural lands of different grades, the best will be occupied first. If 
there is plenty of this best grade, and as long as there is this plenty, 
land rent cannot emerge, because rather than pay rent upon some 
of the lands of this best grade, cultivators will simply take up other 
of these lands still vacant. Lands of this high grade of desirability 
may, however, hold this rank through either one of two aspects of 
advantage : lands equally accessible to the market may be of un- 
equal fertility ; lands of equal fertility may be unequally accessible 
to the market. Illinois lauds, for example, are probably lietter, 
climatic conditions being taken into account, than Nebraska lands. 
This explains in part the higher rents and the derivative higher 
values of Illinois lands. But it does not entirely explain them. 
Illinois lands pay smaller transportation charges. A busliel of 
Illinois wheat or corn, or a pound of Illinois beef or pork, affords 
the larger balance in selling price above the freight. That is to 
say, there are fertility rents and position rents. Of two tracte 
of land, one may enjoy one advantage in a degree to offset c»r 
overbalance its inferiority in the other respect. Thus it is possible 
for near-by lands to rank in rent and in price below more distant 
lands. If, as all lands were less desirable in point of distance, 
they were in precisely equal degree better in fertility, all lands 
would be equally desirable, and, therefore, all be rentiess — 
assuming all the while that there remained unoccupied lands. 

But take it now — following still the Ricardian analysis — that a 
point has been reached where it becomes worth while to cultivate 
lands less desirable than the best grade. This condition will ordi- 
narily be due to increasing demand for product, — • say through in- 
creasing population, — but might conceivably be due to the waning 
advantages of alternative industries. At any rate, if the prices on 
agricultural products are high enough to justify the extension of 



LAND RENT AND COST 185 

cultivation to the pooi'er lands, these prices must also be high enough 
to attach a rent to the better lands. Competition imposes these rents ; 
in fact, these rents, so due to the difference in objective desirability 
of land, are precisely the burdens which cancel this balance of desir- 
ability, and place all upon an equal market footing. One tenant, 
truly, finds it to his advantage to submit to paying rent upon the 
better land, while another tenant achieves his largest renter's sur- 
plus through the cultivating of the poorer and cheaper : but this is a 
difference of advantage attaching to the difference in men, and in 
their adaptations. Looked at from an impersonal — and therefore 
a vague and average — point of view, the different grades of land 
command remunerations commensurate with the objective ad- 
vantages afforded. 

But the Ricardian analysis recognizes that it is only the lure of 
higher prices that induces this widening of the cultivated area — 
this movement of cultivation to a lower land margin in the exten- 
sive sense. For precisely the same reason these higher prices induce 
a more intensive cultivation of the better lands. Each tract of 
land has, in fact, its own intensive margin, the point to which it is 
barely worth while to go in the application of further expense. This 
is the point where the further increment in price product is at 
equilibrium against the further expense of achieving that product. 
In intensive cultivation, the process is not one of opening up new 
land, but of opening up new productive powers of the land already 
in use. So, with falling prices, there is not only an extensive 
abandonment but an intensive abandonment — ■ a partial abandon- 
ment — not an exodus truly, in the covered-wagon sense, but a 
diminished stress of investment, a lessening of pressure, a failure 
to appeal to those productive powers of the land most niggardly in 
their response to capital outlay. 

In truth, that rent attach to any tract of land is conditioned upon 
the carrying of cultivation upon it to an intensive margin. The 
marginal bushel of product carries no rent with it. Exclusive of 
rent, it costs to get it all that it is worth. It is the rest of the crop 
that earns the rent, the more per bushel as each bushel is more 
distant from the intensive margin of disappearing gain. The rent, 
indeed, is paid for the opportunity to grow the supra-marginal 
bushels. Every advance in price establishes this opportunity as of 
greater worth for each supra-marginal bushel, and pushes cultiva- 
tion down to another and more expensive marginal bushel. Mean- 
while, the extensive margin, the area margin, is widening to correspond 
with the deepening of the intensive margin. Therewith, upon the 
old extensive margin, there now attaches an intensive margin — 



186 THE ECONOMICS OF ENTERPRISE 

and rents emerge. Such is essentially the Ricardian theory of land 
hire. 

Rent and price. — But what, then, is the relation of land rents 
to the prices of the products of land ? Is corn high because rent is 
paid, or was Ricardo right in insisting that rent is paid because corn 
is high ? What is the connection — which is cause and which effect ? 
The Ricardian doctrine denied, and many of its numerous adherents 
still deny, that rent can have any share as cost in fixing the price 
of products. This denial was, indeed, as we have already seen, a 
necessary doctrine in the Ricardian system of theory. If prices of 
products were to be made proportional either to the labor applied 
,'" in production or to the wages expended, the products must have 
f their prices determined where nothing but labor or wages entered 
\ into the costs. So it was argued that the price is determined by the 
cost of production on marginal land, land which does not pay rent. 
It was, indeed, both admitted and argued that the costs are less on the 
better lands, but the prices, it was said, are not determined on these 
better lands, but on the marginal lands. The rents paid for these 
better lands were interpreted as surpluses above the cost of pro- 
duction on these lands, or as saved cost, but, in any case, as results of 
I price and not causes of price. These positioas in support of the 
labor-cost theory of price dictated also the taking of some further 
positions, (1) the derivation of all capital from labor — a doctrine 
which does not immediately concern us — - and (2) the distinction of 
land from capital. For obviously, if land could not be distinguished 
from capital, land rents, as related to price, could not be distinguished 
from machine rents or from interest generally. 

But the Ricardian doctrine had hardly been stated, when it met 
the need of extension or of ruodification. For what would become 
of the doctrine, in case there were no marginal land? This query 
finally divided the Ricardian discipleship into several dissentient 
camps. The disciples of the stricter discipline experienced no 
perplexity ; there would still be a marginal production on the non- 
marginal land — a cultivation at the intensive margin. But what, 
then, of the minimum rents paid for even these poorest lands? 
Mostly it was answered that these, like the rents originally discussed 
by Ricardo, had no share in fixing price ; that they were also differ- 
entials above the margin of production, saved costs, equally with the 
differentials above the extensive margin. This widening of the 
issue brought, however, still further dissension. For if all land hires 
were excluded from cost, through an appeal to the intensive margin, 



LAND RENT AND COST 187 

must not machine hires make the same amazing disappearance? 
And if these minimum rents common to all agricultural production, 
the dollar rents, were included, would not the rents on the ten-dollar 
lands ten times as good have also to be included? The " higher 
synthesis " that was needed arrived with the discovery by the later 
Ricardians that not all of the rents were to be excluded from cost, 
nor all included ; that only those should be included which the lands 
would earn in that best alternative employment in which they might 
have been used — but actually were not used — and that those 
must be excluded which were a surplus earning power above the 
alternative use; only, therefore, when the lands were good for 
nothing else would all of the rent disappear from cost as an influence 
affecting prices; only in this remnant was the original Ricardian 
principle still acceptable. 

Precisely what, in this neo-Ricardian theory, will finally become 
of the distinction between land and capital, now that the distinction 
between rent and interest has broken down, — part of the rent 
now entering into price — we may not at this point too curiously 
inquire ; our present task is to examine these various classical or 
neo-classical methods of relating rent to cost of production. On 
which side is really the causation — with prices or with rents ? Or , 
possibly is the question rather one of relative emphasis — the one !,.. 
more cause than effect, the other more effect than cause ? 

The actual relation. — The truth is, as we shall see, and 
as in other connections we have already seen, that the cause > 
of the price is not ultimately with the rent, nor is the cause \ 
of the rent ultimately with the price. The scarcity of the j 
product explains — on the cost side — the price of the prod-\ 
uct. The relative scarcity of the product is in turn explained 
through the relatively limited supply of its sources of pro- 
duction. The rent of the land, equally with the price of its 
product, finds its ultimate cause — so far as the supply is •, 
concerned — in the limited supply of land. But it is none i 
the less true, that, looked at from the point of view of the 
entrepreneur, the hires paid by him for the different factors 
are costs to him, and as costs, are effective to limit his out- 
put of product. These costs are, in fact, the form in which, ■ 
for him, the scarcity of factors expresses itself. Thus, | 
whatever is the hire paid by him, for whatever employed - 
item or thing, that hire is a cost. Nor does it matter whether ; 



188 THE ECONOMICS OF ENTERPRISE 

the employed thing could or could not be used in some other 
industry, or used by some other employer in the same in- 
dustry, excepting so far as the different possibilities of em- 
ployment may bear upon the payment necessary to command 
the service in any given use — only so far, that is, as the 
limitation affects the supply for the particular use in question. 

Still other rent-cost fallacies. — This ought, it would seem, to go 
without saying ; nevertheless, strange doctrines, as we have seen, and 
not a few of them, have made their appearance in political economy in 
the effort to follow out the dogma that rent is no part of cost, and 
in the attempt to fit this doctrine somehow into the facts of business. 

There are, in truth, various sorts of differentials in the payment 
for the use of land, each of whicli has, in its turn, been regarded as 
that particular sort of rent which does not influence price. Sup- 
pose, for illustration, that there is a tract of land worth 100 of rent 
if used in tobacco culture, but only worth 50 in its next best use ; 
that the poorest tobacco land in cultivation earns 25 ; and that the 
poorest land in cultivation for any purpose earns 10. Shall it be 
said that only the 50 of displaced product is a price-determining 
cost, the extra 50 remaining a price-determined surplus? Or shall 
the 25 of rent paid for the poorest tobacco land be taken as cost and 
75 stand as surplus? or only 10 remain for cost and 90 go for 
surplus? Or shall nothing remain for cost? 

If, for example, it were true that all land, even the poorest, were 
in cultivation, and at an appreciable rent for even this poorest, it 
could hardly be urged that not even this minimum rent could form a 
part of cost. Or take products like champagne or tobacco or 
garden truck, commodities produced upon those high rent lands 
which are commonly of a sort to command good rents for other pur- 
poses : shall it be said that none of these rents, or only those on the 
poorest of these lands, can rank as among the costs that influence 
price ? And how exclude any, if not all ? If four of rent upon one 
acre has no part in price determination, why should the rent of 
two acres worth two each per acre have anything more to do with it ? 
If the wages of a two-dollar man are included in cost, why not also 
the extra two dollars paid to a man twice as good? Clearly no one 
of those outlays can be excluded from the cost that determines price 
without excluding all. 

Alternative rent as cost. — But perhaps a stronger case may be 
made for including within the rent-cost of one commodity, say to- 
bacco, only suchpart of the tobacco rent as the land could be made to 



LAND RENT AND COST 189 

earn, if employed in the production of its next best alternative crop. 
This view, as we have seen, would be valid for Crusoe or for a col- 
lectivist economy ; only to the degree that one item of land was im- 
portant in some other use could it be regarded as furnishing a resist- 
ance against any particular use. But does this same analysis hold 
for competitive production ? Will it do to say that the cultivator's 
cost is not what he does pay, but what he would pay if he paid some- 
thing indefinitely, and perhaps unknowably, less ? Would it do to 
include as a wage cost, not what the laborer actually commands in 
the given employment, but some smaller sum that he might com- 
mand in some other employment ? Does the premium upon special- 
ized skill fall out of cost? If so, all competitive computations of 
cost become sheer nonsense. 

But, strangely enough, there is authority in plenty for this 
view."^ 

John Stuart Mill, for example, writes that " when land capable of 
yielding rent in agriculture is applied to some other purpose, the 
rent which it would have yielded is an element in the cost of produc- 
tion of the commodity which it is employed to produce." 

Jevons, objecting, says : " Here Mill edges in as an exceptional 
case that which proves to be the rule. ... If land which has 
been getting £2 per acre rent as pasture be plowed up and used for 
raising wheat, will not the £2 per acre be debited against the expense 
of the production of wheat? " 

And Jevons commendably carries his logic to its ultimate collapse : 
" When labor is turned from one employment to another, the wages 
it would otherwise have yielded must be debited to the expense of the 
new product." 

But perhaps Patten's manner of statement brings out the issue 
most clearly : "If the marginal land used for gardening will yield 
a rent for wheat, the value of the marginal produce of garden prod- 
ucts must equal the cost of the labor employed plus the cost of the 
land when used for wheat." 

1 J. S. Mill, Principles, Book III, Chap. VI ; Jevons, Theory of 
Political Economy, Preface, pp. liii, liv ; Patten, Theory of Dy- 
namic Economics, p. 78 ; Hobson, Economics of Distribution, pp. 
121-125 ; Maefarlane, Value and Distribution, pp. 130-135 ; and 
A. S. Johnson, Rent in Modern Economic Theory, pp. 78-82, are 
among the different supporters of the affirmative ; see Marshall, 
Principles, for the most authoritative exposition of the negative 
argument ; also, A. M. Hyde, Journal of Political Economy, Vol. 
VI, No. 3 (June, 1898). 



190 THE ECONOMICS OF ENTERPRISE 

Surely the product must at least equal in value the labor wage and 
the wheat rent. But it must more than include the wheat rent; 
it must include the rent for the garden use, which has, by assump- 
tion, been important enough to displace the wheat use. 

The error in the half-truth. — But there is nevertheless, as 
has already been indicated, some saving grace of truth in 
this doctrine that only such rents as could be earned in the 
displaced use are costs in the actual use. An influence im- 
portant for the price of wheat, and an influence much more 
nearly fundamental than mere entrepreneur outlay, is vaguely 
in the background of the thought. Still, it is not the dis- 
placed corn rent that makes either the prices of wheat or the 
rents of wheat land higher, nor is it the land which might 
have been used for corn, but instead was used for wheat, 
that makes wheat prices and wheat rents higher — for pre- 
cisely the contrary is the fact — but it is the limitation upon 
the supply of wheat lands by virtue, among other causes, of 
the use for the growing of corn, that makes the supply of 
wheat smaller, thereby the prices higher, and thereby again 
^the wheat rents higher. 

\ And once more be it repeated that neither rent nor any 
' other entrepreneur cost is an ultimate cause of price. Rent 
in any line of production is merely the entrepreneur expres- 
/sion of the limited quantity of agents accessible for that 
Vindustry. But in principle all this holds equally of wages 
and of interest as costs. The relative scarcity of the pro- 
ductive factor renders the products relatively scarce, thereby 
the prices high, thereby ihe remuneration of the factor high. 
The high remuneration is cost, in the sense of an influence 
limiting supply, only as, under entrepreneur production, it 
is the result and the expression of a relatively limited supply 
of agents. 

Cost and profit as distributive shares. — The argument 
thus far sums up in the doctrine that every outlay in produc- 
tion is a cost and every cost outlay a distributive share. 
It must, however, be noted that profit as cost does not pre- 
cisely coincide with profit as distributive share. Profit 
is not an outlay but a remainder. Only such part of it as 



LAND RENT AND COST 191 

is necessary to hold the producer in the given occupation, 
or at the given aggregate of product — only the necessary 
profit — functions as cost. The balance is a surplus above 
cost. In this one respect distributive shares and costs do 
not necessarily coincide — coincide, in fact, only for the 
marginal producer and for his marginal product. 

But it still holds true that any instrument, or agent, or right, or 
opportunity, is a basis of cost to its employer to the extent of the 
hire paid, and to the extent also of such surplus above the hire as the 
instrument or agent could be made to yield the employer in some 
alternative use. If the actual renter at 100 is conscious that he 
could, in another line of production, make the land count him for 102 
of return, the while that it is actually paying him 103 in wheat, he 
must compute, against its actual productivity of 103, a cost not of 
100, the rent outlay, but of 102, the foregone opportunity. His 
cost, so far as it is a land cost, is in his best foregone alternative ; 
in the case supposed, this best alternative was not to keep his 
money in his pocket but to invest it in another hne of production. 
The price necessary to induce the production of the wheat was not, 
in point of land cost, 100 but 102. In the producer's computation of 
costs, these opportunity differentials, however, are commonly in- 
cluded in his total of necessary profit rather than as attached to the 
particular instruments or agents. (See Chap. VI.) 

The place of cost in theory. — Cost, that is to say, is 
purely an entrepreneur reckoning. It is concerned with 
what the entrepreneur has to pay or forego, and not with 
the explanation of why he has to pay or forego it, whether 
because of the opportunities in some other industry or of 
the demands of competitors in the same industry. The 
entrepreneur knows what hires the actual employment forces 
him to pay in view of the restricted supply of instruments 
or agents. But he cannot know, and he need not care, what 
hires the agents or instruments might demand in some other 
employment. He is not, as entrepreneur — but only as 
economist — concerned with the ultimate causes of his 
costs. It is not to his purpose to ask whether the scarcity 
of labor is due to the painfulness or the ill-repute of the 
occupation, or to the shortage of natural ability, or to the 
laziness of human beings, or to the lure of recreation, or to 



192 THE ECONOMICS OF ENTERPRISE 

the alternative openings for hired labor. Nor is it more to 
his purpose to investigate whether his rent outlays are clue 
to the original shortage of land adapted to his uses, or to the 
restricted supply which the requirements of other indus- 
tries have brought about. He may find it expensive to ob- 
tain diamonds for the cutting of glass, cither because there 
are few diamonds anyway, or because what there are are 
so hard to find, or because so many are being worn as orna- 
ments. In any case they are for him expensive to get. 
Cost to the individual entrepreneur, that is to say, is not a 
fundamental explanation of anything; it assumes prices 
upon instrumental facts as a step toward explaining price. 
Nor does the aggregate activity of entrepreneurs explain 
the cost conditions facing each, unless and until the great 
underlying facts of human wants and capacities, and of in- 
strumental equipment and opportunity, are included in 
the survey. 

The influences behind costs. — The entrepreneur's analysis 
takes as definitive and ultimate the actually existing total 
situation, inclusive of human needs and productive powers 
and of all the existing supplies and existing limitations of 
equipment and opportunity and institutions, — and all of 
this irrespective of how far the situation is due to an original 
bounty or to an original inadequacy, and irrespective of 
whether human activity has in the past added or subtracted 
relevant elements, aspects, or facts. Fundamentally, how- 
ever, not the outlays for productive facts, or these same out- 
lays regarded as incomes, but the scarcity of these productive 
facts relatively to the human need, is responsible for the 
emergence of scarcity of products anywhere and for the 
relative scarcity of products which underlies and explains 
exchange relations. But the entrepreneur is not concerned 
with fundamentals. 

Nevertheless, the inadequacy of the general equipment 
does not explain the market price of any particular line of 
products or the exchange relations between different classes 
of goods. Inside the general situation of the inadequacy of 
productive factors must be worked out the relative inade- 
quacy of productive equipment for the various lines of com- 



LAND RENT AND COST 193 

modities, in view of the relative strength of the purchasing 
power disposable in these various commodity directions. 
Here enter the influences of various different lines of pro- 
duction to restrict the supplies of productive factors in each 
particular line. 

Price-determining versus price-determined costs. — No- 
where, in fact, is the distinction between price-determining 
and price-determined costs valid. In the main, the value 
of each productive fact is price-determined ; but as part of 
the supply of productive facts, each is, through its products, 
in its small measure, a price-affecting influence. So, also, 
each individual activity bearing upon price or related to 
price, whether, on the one hand, the producer's supply price 
or, on the other hand, the consumer's disposition to pay or 
not to pay, is, in the main, price-determined, because chosen 
in view of the actual price situation and in adaptation to 
this situation ; but each such activity, as affecting in its 
own small measure the aggregate of supply or of demand, 
must thereby and pro tanto act as a price-determining in- 
fluence. 

The only one, then, of the several rent concepts important 
to the cost analysis is that of the actual hire ; but as oppor- 
tunity cost, the land or any other productive fact may figure 
as cost at something vaguely more than the actual hire 
paid. 

It should now be clear that, from the point of view of the 
aggregate product, it is important to society that it have not 
merely a genefrous equipment of factors of production but 
that these factors be in the right proportions ; that right 
proportions are often matters of the technical relations be- 
tween factors ; that although, within limits, more of one 
factor may atone for less of another, there still are limits — ■ 
the process of substitution not being indefinitely applicable ; 
that this rightness of proportion is really another aspect of 
the impossibility of indefinite substitution, and expresses 
merely the fact that the effectiveness of each factor is in large 
degree dependent on the presence of other, and therefore 
complementary, factors. 

It has also been suggested — ■ and will in later chapters be 



194 THE ECONOMICS OF ENTERPRISE 

demonstrated — that these complementary relations between 
factors exist side by side with other relations of possible sub- 
stitution ; that each of these relations so varies with develop- 
ing and changing conditions of technique, and varies in ways 
so numerous and so complex in degree, in direction and in 
kind, as entirely to discourage all attempts at the classifica- 
tion of factors on the basis of their technological interrela- 
tions. 

And further ; even if, in the social view and for technologi- 
cal purposes, land were so distinct and peculiar in its func- 
tions as to permit of classifying it separately and of avoiding 
the immediate necessity of indefinite subclassification, nothing 
would have been accomplished of service to the competitive 
analysis or even relevant to it : land rent would remain as 
clearly a cost in the competitive regime ; the Ricardian 
attempt at the marginal exclusion of rent from cost would be 
neither the more nor the less hopeless ; the distinction between 
rent costs and other costs in their bearing on price would 
remain impossible ; the separation of land from capital 
would be equally gratuitous ; the antithesis between price- 
determining and price-determined costs must not the less be 
abandoned ; the labor theory or the wage theory of price must 
still be declared a grievous error involving a long series of 
associated or derivative or contributing errors. 

The next chapter will trace the essential similarities of 
urban to agricultural rents. It will be shown that while 
urban rents are almost entirely positional, the differences in 
position are the basis of a wide diversity, both in degree and 
in kind, in the ultimate incomes attaching to urban lands and 
in the derivative money incomes ; that in the main the growth 
of urban rents in the aggregate, as compared with agricultural 
rents, is due to the development of technique in its bearing 
upon agricultural production, taken in connection with the 
marked inelasticity in the consumption of agricultural prod- 
ucts ; that at the same time, the development of urban trans- 
portation has profoundly affected the distribution of posi- 
tional advantages within the city — widening greatly the 
city area, diminishing the density of the population, and 
scattering the residence centers ; but that the effects have 
been equally marked in consolidating and congesting the 
central retail area at the chief intersecting point of the lines 
of urban passenger service. 



Land rent and cost 195 

The chapter will then examine the most plausible of all the 
arguments for the view that land rents take no part in the 
fixation of price, and will show that, even with reference to 
the rent costs of merchandising, the classical position is un- 
tenable ; that the rent costs of merchandising are only one of 
many different costs attaching to the selling of goods. Shall 
outlays for advertising be also excluded from price-determin- 
ing cost ? for transportation ? for taxes ? It is true that all 
competitors pay these different costs in approximate ratio 
to the advantages attending them. So competition forces 
rents high enough to cancel most of the advantages going 
with differentials of position — precisely also as agricultural 
rents cancel the objective differences of advantage between 
different grades of cultivated lands. But the exclusion of any 
cost outlay by this test would compel the elimination of all 
differences in wages from cost. And finally the chapter will 
return to a further emphasis of the truth that rent costs, like 
all other costs, are merely signboards pointing to the ultimate 
explanation of price rather than themselves such explanation. 
Not the rents paid for urban sites for business, but only the 
restricted areas for the transaction of this business, are the 
ultimate terms in the explanation of the prices of the goods 
sold. 



CHAPTER XIII 

URBAN RENTS, AGRICULTURAL RENTS, AND COSTS 

Position and city rents : business sites. — With agricul- 
tural rents, there are, as we have seen, two aspects of 
differential advantage, position and fertility. With urban 
rents, the sole appreciable influence is that of position. But 
with this one fact of position go many different kinds of 
advantage. For retail business, convenience of accessibility 
for retail customers is the controlling factor. Thus the 
business section of the city is constantly extending its ten- 
tacles into the residence districts — the shops little by little 
establishing themselves farther out as the city grows, traffic 
eating its way into what were earlier the places of quiet. 
And frequently also, with the increasing size of the city and 
with the increasing difficulty of retail service from one down- 
town business nucleus, there grow up other nuclei of retail 
trade, commonly near to suburban railroad stations, or at 
intersections of street-car lines. Large prices attach to the 
more favorably situated of these business sites. That twice 
as many people pass a corner lot as an inside lot is the expla- 
nation for the higher rents and the higher market prices of 
corner properties. Thoso businesses peculiarly dependent 
upon the custom of chance passers-by, or in marked degree 
dependent upon ready accessibility for their clientele, e.g., 
drug stores and banks, are especially likely to choose 
corner locations. The value rests in the opportunity for 
gainful trade. Position counts for much in controlling 
trade — serves in place of advertising — is, in effect, one 
means of publicity. The sale price of the lot is the present 
market worth of the gains which the control of the location 
promises — an expectation extending often far into the 
future, and not rarely embracing prospects of gainful trad- 
ing with generations yet unborn. 

196 



URBAN RENTS AND COST 197 

With wholesale houses, the more important consideration 
is that of shipping facilities — nearness to stations and 
wharves. Manufacturing plants especially covet good 
side-track service for the receipt of materials and for the 
outward shipment of finished products. Residence lots 
trace their value in the main to a similar and yet a different 
set of influences — to sightliness, healthfulness, nearness to 
schools and churches, convenience of street-car service, and 
especially to the character of the neighboring residents and 
the quality of the surrounding improvements. Among 
the most important of these improvements are the actual 
or prospective paving and grading of streets, and an estab- 
lished service of gas, water", light, and telephone. 

Residence sites. — In the large and in the aggregate, the 
rents and prices of residence property are evidently dependent 
upon the size of the city. The greater the population, the 
more the city must absorb the near-by farm areas, the more 
the pastures must be cut up into city lots. The residence 
margin is like the extensive margin of cultivation, extending 
constantly to the more and more remote and less desirable 
lands. The remoter lots are available for homes only on 
terms of larger passenger rates and of greater expenditure 
of time and convenience. Lands at this extensive margin 
of city growth command small rents and therefore bear very 
limited prices. Even when a suburb enjoys especial ad- 
vantages of sightliness or of beauty or of wealthy dwellers, 
the land values are likely to be low in comparison with lands 
similarly favored but nearer to the municipal center of 
things. The differentials, therefore, which characterize 
agricultural holdings are equally manifest, after their own 
kind, with urban sites, whether utilized for residence or for 
commerce. 



Differential advantages in position. — The theory for the case 
may be illustrated as follows : If, from a distant spring, we supply 
ourselves with water without charge, and from a spring near by pay 
a water fee, the difference in money outlay may be regarded as not 
so much a difference in the amount of rent as in its direction and 
kind. With a distant spring, the rent is a travel rent, the market 



198 THE ECONOMICS OF ENTERPRISE 

equivalent of the money rent of the nearer. Precisely so, the better 
residence sites command a money differential above the less de- 
sirable and the marginal sites. So far as the differentials are merely 
those of transportation, our analysis might then declare that the 
distant lands pay rents in terms not of landlords' exactions, but 
rather of walking to and fro upon the earth, or of the keep of car- 
riage and horse, or of outlays for train and tram service. The less 
remote lands return their rents for the most part in the form of 
money accruing to the landlords, as the condition on which these 
alternative burdens are to be avoided. And if the occupant himself 
is the owner, his investment justifies itself as the cash outlay on 
terms of which he is excused from other sorts of rental charge. 
He loses interest receipts, but thereby protects himself from rent 
outlays in cash, or from the alternative burdens of inconvenience, or 
of constant driblets of car fare. 

The product from position. — In fact, however, urban residence 
rents are much more than mere transportation differentials. Perhaps 
the largest outlay is for the privilege of Uving on the street where 
live the people that one hkes to be known to Uve near. In truth, 
while urban lands bear no crop in the ordinary agricultural sense, 
the crop is still there, though of a less tangible and material sort. 
The ultimate incomes which they afford, and of which the money 
rents are the market prices, are incomes of comfort or health or 
convenience or beauty or privilege — real and actual and valuable 
incomes despite their lack of all weight or bulk or spatial extension — 
incomes which motivate and explain the command of money rentals 
as the market value of the ultimate incomes of service. 

Rent and individual desert. — It is obvious that with 
agricultural and urban lands the rents and the derivative mar- 
ket prices are commonly due in no appreciable degree to the 
skill or industry of the present owner or of any former owner. 
That a farm in a new country rises in price is due to the fact 
that the world demand for agricultural products is increas- 
ingly placing a premium upon the agricultural opportunity 
which this land controls. New lines of transportation are 
affording quicker and cheaper access to a wider and wider 
market ; therewith a larger gain attaches to the land, not 
solely in the saved expense of marketing its products, but 
also in the lower prices on all purchased supplies — imple- 
ments, raw materials, and foodstuffs. 



URBAN RENTS AND COST 199 

Rents and improving processes. — Whether these better 
conditions of transportation would help any particular farm 
or locality, were the improvements adopted generally rather 
than merely locally, we need not now inquire. It is, at 
any rate, clear that transportation is only one of the ways in 
which the advance of civilization tends to lower the costs 
and the prices of agricultural products. Diminishing charges 
for machinery, and every improvement in the technique of 
cultivation — e.g., new methods of rotating crops, deep 
plowing, better fertilizers — work to lower the costs of the 
product and to increase the volume to be marketed. Better 
varieties of crops are likewise effective in diminishing the 
costs. All these different lines of advance are evidently 
social in their origin ; but equally evidently, they are indi- 
vidual in their contribution to gain, so far, at all events, 
as they tend toward higher rents on lands rather than toward 
lower prices for the consumers of products. (See note, p. 456.) 
Society makes the improvement, and the individual landholder 
seizes the benefit. His title of ownership in that which he 
has not produced authorizes him to collect a rent from his 
fellows for that which is not his but their accomplishment. 

Rent as a distributive fraction. — Nor is this all of the case, 
so far as the higher rents are due to an increase of population. 
The strongest influence toward rising rents is the movement 
of cultivation to poorer grades of land, as induced by the 
increasing demand for agricultural products and the deriva- 
tive higher prices. If labor and appliances and fertilizers 
are to achieve their best results, it is necessary that the land 
factor in production be in proper proportion to the other 
factors. Agricultural industry seriously suffers in its prod- 
uct if the supply of land is inadequate. This is simply to 
repeat what, in a slightly different connection, was set forth 
in the preceding chapter ; it is merely to emphasize the social 
significance of the law of the proper proportion of factors, — 
a law which, in its special application to agricultural produc- 
tion, is commonly known as the law of diminishing returns. 

Population and rural rent. — How much land one may 
advantageously work and with how expensive equipment,. 



200 THE ECONOMICS OF ENTERPRISE 

depends, of course, on what crop he is going to raise. But 
one cannot ordinarily raise as much per acre from four acres 
as from two, nor can one ordinarily, by doubling wage and 
other expenses on his ten acres, thereby double the product. 
Were it possible continually to double product by doubling 
the non-rent expenses of cultivation, there could never come 
any need of more cultivated land, no matter what increase 
might take place in the demand for agricultural product. 
As the situation actually is, a larger demand for product is 
met in part by the cultivation of more land. 

It has likewise been made clear that if population were suffi- 
ciently sparse, only the best land would need to be cultivated ; 
and that if the supply of this land outran the need, no rent 
would have to be paid by any one, since, if rent were de- 
manded, the cultivator would have his choice of other lands 
equally good. But, with any considerable increase in popu- 
lation, land of inferior quality or land at inconvenient dis- 
tances must be brought under cultivation, and rent be paid 
for all land superior in quality or position, according to the 
degree of the superiority. With third-quality land in use, 
the second quality commands a rent. 

Urban versus rural tendencies in rents. — Increase of 
population, then, it is clear, is a force making for the increase 
of agricultural rent. All local and special improvements 
in transportation, in methods, in varieties of crop, tend to 
raise the rents of the particular land affected by them, but, by 
increasing the supply of products, tend to diminish the rents of 
those lands not so affected On which side rests the balance of 
effects is a problem which will later require a deal of attention. 
(See note, p. 456.) But by far the more important effects 
of these different sorts of improvements are in other direc- 
tions — in the strong influence toward the growth of urban 
populations and toward the colossal rise of rents in the cities. 

With a given population, the consumption of agricultural 
product is neither greatly to be increased nor very seriously 
to be diminished. Especially does this hold of food products. 
It would be going too far to assert that there is an entire 
lack of elasticity here, that no more and no less of food and 
of the raw materials of industry can, as an aggregate, be 



URBAN RENTS AND COST 201 

consumed. There is doubtless some elasticity in either 
direction. All that can safely be asserted is that this hne 
of consumption is relatively an inelastic line. If the world 
harvest of any year were twice the usual return, much food 
would rot upon the ground as a useless surplus. On the 
contrary, were the harvest only one half the normal, the 
richer people and the more well-to-do would bid up the price 
mostly beyond the reach of the hungry poor. The break- 
ing down of the social order, the general loosening of social 
bonds, and the rule of the strongest would be the result. Only 
pillage, riot, and rebellion would remain to the poor. Two 
centuries ago, an Italian wrote : "A disgusting thing is a 
rat ; but in the siege of Cesilino, one sold for eight florins. 
And it was cheap at that, for he that bought it lived, and he 
that sold it died." Recall also the prices of products and 
the public disorders in the siege of Paris in 1870. 

Primitive agriculture imposes country living. — The fact 
that food is the primary human need is the explanation of 
the prevailingly agricultural character of the mediaeval 
societies. What, in fact, has been the meaning of the re- 
distributions of population especially characterizing the 
last two centuries? The urban population has far out- 
stripped in rapidity of increase the agricultural population. 
The growth of the small city as against the country, and of 
the great city as against the small city, is one of the most 
obtrusive facts of modern life. The new and agricultural 
countries like America and Australia, equally with the older 
countries, manifest these redistributions of population ; and, 
on the other hand, in point of the degree of the tendency, the 
thickly populated countries of Europe fall not at all behind 
the sparsely and newly settled countries. City growth is 
general in the modern world. 

Better agriculture increases city living. — The growth 
of the city is not ultimately to be explained by the improve- 
ment of industrial processes. Only such men can work in 
manufacturing as the falling prices of food products rela- 
tively to manufacturing products dismiss from the processes 
of food production. So long as the food product from one 
man's labor sufficed for the food requirement of only one 



202 THE ECONOMICS OF ENTERPRISE 

man, the entire population was compelled to occupy itself 
with agriculture ; now, when one man's labor will feed three 
men, two thirds of the population may be urban. So also, 
the development of transportation serves for the most part 
to explain, not why so large a proportion of the population 
is now agricultural, but only the distribution of the non- 
agricultural population. To the extent solely that trans- 
portation has opened up more land or better grades of land 
to agricultural uses, or is itself to be ranked as one of the 
processes of agricultural production, is transportation re- 
sponsible for the growth of non-agricultural employment. 
And precisely here it should be remarked that to the extent 
that, in the production of implements and appliances, manu- 
facturing is itself an agricultural process, to precisely this 
extent industrial improvement must have limited the growth 
of the rural population. 

Improving transportation, then, so far as it is not at the 
same time to be regarded as improving agriculture, has had 
its effect, not in emphasizing the growth of urban as against 
agricultural population, but in fostering the growth of the 
small city as against the village and of the great city as against 
the small city. Looked at from a more distinctly technologi- 
cal point of view, this truth would read that transportation 
has fostered the giant industry as over against many small 
competing industrial units.^ 

Similarities between urban and rural rents. — But however differ- 
ent are the forces which make for an increase of urban population, 
and thereby raise urban as against rural rents, it is clear that 
many laws are common to both. As cultivated lands find their 
margin at the alternative use for grazing, forestry, and the like, 
so town lots may find their margin at the alternative of market 
gardening or of other intensive cultivation. Improved urban trans- 
portation lowers the rents of inside lots and raises the rents of the 
remoter sites, just as the near-by agricultural lands lose in rental 
value while the distant lands are gaining. Precisely as the dearer 

^ The New York Commercial and Financial Chronicle of Decem- 
ber 9, 1911, reports the sale, at $866 per square foot, of a tract of 
land on Broadway comprising 1154 square feet. This price was at 
the rate of $37,500,000 per acre. 



URBAN RENTS AND COST 203 

agricultural lands require and justify a more intensive tj^De of culti- 
vation — require, that is, larger expense in labor appliances and 
fertilizers, together with larger expense in land rents — so the high- 
priced urban sites require a correspondingly more expensive type of 
improvement if the total investment is to yield its maximum rate of 
return. Urban lands equally with rural lands exhibit this necessity 
for observing the due proportions of factors and the due distribution 
of expense among them, in view, of course, of the terms upon which 
each is to be had. Both manifest the same limitations upon the 
applications of further doses of expense, — with agricultural lands, 
the point where further outlays barely return an indemnity in the 
price of the added product — with urban lands, the point where the 
interest upon further outlays is barely remunerated by the added 
earning power of the property. Shall the building be carried another 
jfloor higher? What, through added height and extra thickness of 
wall, will be the yearly cost of this extra story as against the in- 
creased rentals to be collected? It is, then, the high ground rents 
and the high prices of city properties that push the buildings higher 
and higher into the air. Without these lofty and expensive struc- 
tures some of the earning powers of the land must go to waste. 
The renter or owner would be paying for them but failing to use 
them. It is for him rightly to apportion the factors in his invest- 
ment or to lose. All these laws, then, are equally applicable to 
urban and to rural rents. 

Transportation and city life. — Developing urban and surburban 
transportation have, then, been effective to extend the city over a 
much wider area, greatly limiting the rise of rents upon inside 
residence sites and greatly enhancing the rental values of outside 
properties. Comparing cities equal in size, the modern city is far 
less crowded then the mediaeval ; there are more separate houses 
and with larger yards — in general, a smaller population to the 
acre. It was not so much the need of the mediaeval city to be walled 
that caused it to be compactly built, as that, being compactly built, 
it could be easily walled. To fortify in this way a modern city of 
equal population, were it necessary, would be a much more serious 
problem. And likewise, with these large areas, go greater expenses in 
paving, grading, sewering, and for gas and water service, together 
with constantly greater difficulty in lighting and policing the streets. 
The high taxes of the modern city life are in no small part a matter 
of the mere area which the modern city covers. 

Transportation and business rents. — But, curiously enough, the 
business district of the modern city has become not less, but more, 



204 THE ECONOMICS OF ENTERPRISE 

compact with the growth of urban transportation. As a matter of 
ready connection of one urban line with another, and of easj^ transfer, 
it is important that all the urban and suburban passenger lines have 
something like a common terminal. Thus all tend to converge at 
the'city center, like the spokes at the hub of a wheel. This point 
of common meeting becomes, in turn, still more emphatically the 
municipal center, and a center which, by the very necessities of the 
case, cannot cover a very wide area. Even with the device of an 
inner loop line connecting the different converging roads, the area of 
congestion is not greatly extended, and a sharp line of demarcation 
in rental values is set up between the property within the loop and 
that outside. Inside this narrow area, values shoot skyward al- 
most as obviously as the buildings. Grouped compactly about this 
favored district will be found the remainder of the distinctly down- 
town shopping and wholesale business houses. 

The subordinate business streets of the city will mostly be found 
to follow the lines of passenger traffic out into the residence districts. 
In no city of the modern tjq^e of growth could a great retail shop be 
situated as is " Au Bon Marche " in Paris — a mile or so away 
from general business, across the Seine, in a quiet residence quarter. 
Nor, with the general trend of things, is this business likely long to 
thrive in this locality. 

Business rents and prices of goods. — Leaving it still 
to stand as dubious whether for the next few hundred years 
agricultural rents will rise or fall, but holding it as certain 
that urban rents will sharply rise, we now turn to examine 
the relation of shop rents and of factory rents to the selling 
prices of commodities. Is it true that the rent of the urban 
site, the ground rent, paid by the factory or by the retail 
business or by the wholesale establishment, is not a price- 
determining cost in the commodities sold ? Do the products 
sell readily or sell at good prices because the rent is paid, or 
is the rent paid because the products sell readily or at good 
prices ? Are the rents the results or the causes of the prices ? 
What, for example, shall be said of the occasional advertise- 
ment of some competing merchant that he can make low 
prices because his rent outlays are low? Or is it rather true 
that the prices, so far as rents are concerned, are fixed by 
some suburban dealer, some man on the outside circumfer- 
ence of things, at the extensive margin of retail competition, 



URBAN RENTS AND COST 205 

where the land rent is approximately nil? Or are the prices 
fixed at the intensive margin, the point at which the non- 
rent cost of putting the goods upon the market sets a limit 
to further sales — where, that is to say, the site gives no 
further services in selling, the incidental crowding and 
" messing " of things imposing the choice between more 
space at more cost and a reduction in the volume of business ? 

What does cursory observation indicate as to the bearing of ground 
rent on price ? Do retail merchants at the extensive margin in the 
city or others in the small town, sell more cheaply or less cheaply 
than the down-town dealer in the city? And when, if either, and 
why? The neighborhood grocer in the suburbs can, if he must, 
charge more than the down-town grocer, because the former really 
sells a little different good — the same material thing plus, however, 
utilities both of place and of time — ready and immediate accessi- 
bility. Likewise, one commonly pays more for pins and needles 
and thread and cotton prints and sheeting, if one buys in a small 
local shop. But this is due to the fact that the customers are few : 
both the non-rent costs and the rent costs may be higher relatively 
to the volume of sales. In view of the paucity of customers and the 
non-rent costs of making each sale, the land is not worth a high 
rental. 

Place utilities and costs. — ■ But possibly the country dealer is not 
safely to be compared ^vith the city dealer, because of the freight 
rates which the country dealer must include in his prices, so far as 
his goods are bought from the wholesaler. Lumber, for example, 
is likely to be higher in the small town. But the same fact of freight 
holds for the suburban grocer : he buys from the down-town whole- 
saler and from the down-town produce broker. His costs are there- 
by greater, as the condition on which he can supply the higher 
suburban utilities of place and time to his suburban customers. In 
those quarters of town in which the customer neither can nor will 
pay much for these utilities, the dealer must make good these 
extra costs by economies in other lines — a less attractive or con- 
venient or tidy or spacious place of business. His goods may be 
dearer or cheaper than the goods of his down-town competitor, but 
they are evidently not precisely the same goods. 

Nor is it clear that the down-town goods are always the cheaper. 
On one street, they may indeed be appreciably cheaper than on 
some other street a bit more conveniently reached by customers. 
If the customers go to the cheaper street, they pay a part of the 



206 THE ECONOMICS OF ENTERPRISE 

purchase price in walking. Again, it is not rare that the wares of 
one dealer are especially high, because it is good form to have an 
account with this dealer — the best people all do it ; all high-class 
dressers have their clothes made by tailor X. The same thing with 
the mark of another tailor might occasion some humiliation — that 
is, would not be the same thing for the purpose. 

So far, then, as observation indicates, differences in prices do not, 
on the whole, seem to be explicable by differences in rent, but rather 
to be mostly due to other causes peculiar to the respective cases 
under examination. Nor even where one merchant gets higher 
prices than another does this seem to be due to the fact that his rent 
is higher, any more than the higher rent appears to be due to his 
higher prices. The same goods sold by him are not really the same : 
they are really better for some of the purposes for which goods are 
bought. And when the pi-ices are clearly due to differences in loca- 
tion, there again are discovered differences in goods in point of 
convenience or place or time. 

Rents are selling costs. — Here, then, if anywhere, is 
there a strong case for the doctrine that rents, — this kind 
of rents, — do not enter as causes into the selling prices of 
goods, but are rather the results of the prices. 

But the truth is that rents are one of the costs of selling 
goods. In large part, they are like advertising outlays, wages 
of salesmen, provision of rest rooms, free directories, chairs 
for the ladies waiting for the car. They are the costs of 
furnishing the particular kind of good, a good of a partic- 
ular place and time ; or they are a hire paid for the op- 
portunity of meeting so many customers and of making so 
many sales. The choicer locations promise larger gross 
gains, through the larger number of sales or through the 
especially favorable prices at which the sales may be made. 
Therefore the competition of dealers seeking these gains 
mostly cancels them, to the advantage of the landlord in 
his larger rents. Rent is the market price of the gain- 
promising opportunity. If the prices which can be charged 
are higher, the rent costs tend also to be higher. Or if the 
other expenses of selling are diminished, the rent is the charge 
collected for what, without the rent, would be a saving and 
a gain. The case is like paying wages to better laborers 



URBAN RENTS AND COST 207 

for their greater product, or like paying salaries to efficiency 
engineers for devising economies of operation. These added 
services impose costs upon any operator precisely because he 
cannot have these additions without paying for them. If 
one merchant will not hire the land, another will. It may 
well be true that whatever customers one merchant gains 
other merchants lose, — that the control of the more favor- 
able site has only a purely competitive and differential sig- 
nificance, — but this is not at all peculiar to the problem of 
business rents. It is precisely so with most advertising 
competitions and with the larger part of the outlays made 
for commercial travelers. It is the admitted vice of many 
competitive activities, that they increase the cost of achiev- 
ing a given result, that they are socially wasteful, and that, 
increasing the costs, they commonly increase the necessary 
price. 

The ultimate cause is the scarcity of sites. — But this is 
not the final reply to the contention that business rents are 
not price-making costs. It is true that if the landlord must 
accept a lower rent, this would not diminish the price, but 
merely leave a larger profit to the tenant merchant. But 
the difficulty is ultimately neither in the rental nor in the 
personal distribution of it, but solely in the fact that the 
convenient and attractive and popular business sites are 
limited. And this is true in the very nature of the case ; not 
all the different streets and corners can offer preferable loca- 
tions. The inevitable congestion of merchandizing at the 
intersecting streams of travel — that is, in the down-town 
district, and particularly at the focusing point of all the dif- 
ferent main streams of travel — limits the supply of good sites, 
and thus makes the peculiar products of convenience of place 
and time a limited quantity, and therewith the price of these 
conveniences high. Goods of similar weight and texture 
and flavor, sold under conditions of less convenience, are 
really not the same goods. Precisely so with those forms 
of advertising which merely avail to create a demand for 
things; they are really processes of attaching to things a 
desirability which the things previously had not. Thus the 
process is merely one of the creation of value on terms of 



208 THE ECONOMICS OF ENTERPRISE 

submitting to a cost. In larger part, the rents of business 
sites are of this general sort. It is, however, occasionally- 
true that the rent of a particular site is paid for the advantage 
of achieving a lower selling price, which lower price may 
carry with it the opportunity of larger sales ; this site com- 
mands a high rent because of its especial adaptation to the 
policy of low prices with large sales, — wherewith is to go a 
generous aggregate return upon the business done. But 
forthwith, the higher rental has to be subtracted from the 
larger gross profits : the higher rent expresses the fact that 
the site is the controlling influence in the case. 

The following chapter, accepting cost of production as a 
correct, albeit not an ultimate, explanation of the market 
prices of ordinary consumption goods, will inquire how far, 
and through what bearing, cost of production is to be regarded 
as also the explanation of the prices of durable consumption 
goods and of durable production goods. If durable produc- 
tion or consumption goods are rightly taken to depend for 
their prices upon the capitalization process, and interme- 
diately upon future incomes and discount rates, is cost of 
production therefore to be accepted as explaining prices only 
in the limited field of immediately consumable goods, and as 
leaving the prices of all other goods to be explained through a 
separate and entirely distinct analysis ? For example : has 
cost of production no bearing on the prices of pianos or of 
harvesting machines ? 



CHAPTER XIV 

CAPITALIZATION VERSUS COST AS DETERMINANT OF PRICE 

Hire and service. — We have seen that the existence of a rent or 
of a wage or of any other hire upon any productive thing is the proof 
that, for the purposes of those who rent or hire, the thing in question 
is productive — promises gain, aids in the acquisitive process ; but 
that it does not follow that the rent or wage paid by the individual 
who hires is the precise correlative and equivalent of the significance 
of the thing to society or even to him ; the hire is merely the market 
price of the service. 

Services present and future. — We have seen also that some of 
the services that men are willing to pay for are obtained from goods 
immediately and completely utilized ; that there are other valuable 
things for the enjoyment of whose services a considerable period 
of time is necessary — where, in mathematical phrase, the service is 
something hke a function of the time ; that some of these are dur- 
able goods employed in putting commodities upon the market — 
mostly goods like agricultural lands, machines, patent rights, 
franchises, milch cows, sheep, barns, working cattle, delivery 
wagons, freight cars — goods which are used in the process of pro- 
ducing other goods or services, where the ultimate products are 
ordinarily to be sold ; that others of these durable goods are used 
directly for purposes of consumption, whether by the owner of them 
or by some one else — e.g., town lots, automobiles, library books, 
driving horses, houses, carriages, pleasure boats, furniture, clothing, 
pictures ; that it does not at all matter to the reality of the income 
rendered by goods of this second class whether one lives in his own 
house or lets it out for rent, — drives his own horse, or puts it in his 
Uvery barn, — uses his own furniture clear of debt, or is paying for 
it in installments at the furniture store, — rents it out to some other 
user, or makes it part of the furnishings of lodgings or of his home — 
precisely as it does not matter as a question of production whether 
one consumes the vegetables from his garden or sells them, whether 
one eats the eggs from his poultry house or markets them. If one 
is the owner of the goods, he avoids pa3ang the hire of them, but is 
p 209 



210 THE ECONOMICS OF ENTERPRISE 

compelled to make the larger immediate outlay in the purchase of 
them. If he hires, he pays the more in the long run, but has not to 
pay so early. 

Present price and future service. — The present worth of a 
durable consumption good is due to the fact that to own it is to be 
entitled to a series of valuable services from it : it may excuse one 
from the recurring necessity of renting it ; or it may impose upon 
some one else the necessity of paying to the owner a rental income 
upon it. The good is productive in either case, whether as bringing 
the owner an income of services, or of money with which to buy 
commodities or services, or as excusing him from outlay. In buying 
a durable good, you really acquire by one payment the right to a 
series of services — operating, so to speak, not at retail, but at 
wholesale, in services accruing in a time sequence. 

Everywhere value depends on income. — Thus it has become clear 
that as ultimately any good acquires value through the fact that it is 
adapted to the rendering of valuable services — psychic incomes, as 
these are sometimes called, — that, as wool commands a price because 
of the good derived from its use, — the result that it controls, — pre- 
cisely so a sheep is valuable according to the results which it controls 
in valuable wool, etc., a cow is valuable for the valuable milk that it 
gives — meadow lands for the recurring crops of valuable grass — 
houses for the continuous shelter they offer — pianos for the 
hours of valuable pleasure they afford — pictures for the valuable 
beauty that they untiringly present — bonds for the interest that 
they pay, stocks for the dividends that they yield. So, to cut grass 
from a field or to gather fruit from a tree is merely the owner's way 
of severing his maturing coupons from the parent stem. If, in fact, 
grapes were to be gathered from thorns or figs from thistles, thorns 
would no longer be thorns, or thistles, thistles. All possessions that 
bear rent trace their value tu the rent that they bear — all equipment 
goods to their forecasted earnings — all durable consumption goods to 
the services that they promise. The price of any one of these bases 
of incomes is the present worth of its expected future returns. The 
price not only of every investment in stocks, or bonds, or farms, or 
business blocks, or tenement houses, or annuities, but as well of every 
investment in houses, or furniture, or pictures, or books, or bicycles, 
or automobiles, or senatorships, is the present worth of what the 
investment will return in income — whether a money rental of 
interest or of dividends, or beauty, or comfort, or leadership, or fame. 

Capitalization gives capital. — And it has been shown to 
follow from all this that, given incomes to start with and 



CAPITALIZATION VERSUS COST 211 

given either a discount rate or a discount attitude for the 
capitalization of these incomes, there forthwith necessarily 
emerges capital.^ 

Cost, capitalization, and price. — But in accepting the 
capitalization process — where it applies — as an explana- 
tion of market price, what place is left for cost of production 
as the determinative fact? This is the problem of the pres- 
ent chapter. The capitalization doctrine purports to explain 
market price through an appeal to the future earnings of 
production goods and to the future uses of consumption 
goods. It is a forward-looking explanation. Cost of pro- 
duction, on the other hand, explains price by appealing to 
the past of the good, to the conditions attending its pro- 
duction — a backward-looking explanation. Is one or the 
other of these doctrines false, or is it possible to harmonize 
them? 

The reconciliation, if possible of attainment, must be ar- 
rived at by one more appeal to the fundamental generaliza- 

^ And thereupon it follows that free human beings are not capi- 
tal. They do not get capitalized. The future earnings are not, 
under the perspective process, summarized into a total of mar- 
ket worth. Not only this ; but capital is a possession, a subhead 
under WBalth. In order, therefore, to be capital, human beings 
must be reduced to individual possession, to property, a source of 
income to the possessor. The concept of wealth or capital connotes 
something external to the owner, an item in his environment. 
Therefore, no human being can rank as part of his own wealth, nor 
can any part or subdivision of him — his legs, or arms, or strength, 
or beauty, or digestion, or intelligence — be wealth to him. Other- 
wise, the distinction between owner and thing owned, possessor 
and possession, subject and object, property holder and property, 
capitalist and capital, organism and environment, is obscured and 
violated. Such things, therefore, as are not the subject of in- 
dividual possession lack the logical possibility of ranking within the 
capital subdivision of wealth. Nor is this the only difficulty in 
terming free men capital : capital has only one mode of expression, 
the value or price expression. Value and price are market facts ; 
no unmarketable thing can be capital, being neither to be had 
nor to be retained by the sacrifice of price. Men do not get 
funded under the discount principle into an aggregate of wealth. 
Otherwise, wages, like rents, would be mere interest in one of its 
m.any manifestations. 



212 THE ECONOMICS OF ENTERPRISE 

tion in economic theory ; namely, the fixation of price through 
demand and supply. Cost of production, as we have seen, 
purports to explain price only in the sense and to the degree 
that it explains supply. But if the past of a good explains 
the supply, may not the future of the good explain the de- 
mand ? Or, to put the same thing in another way : May not 
cost determine the reservation price, the asking price, the 
while that capitalization of the future earnings determines 
the price offer, the demand ? 

This view certainly approximates the truth, but falls still 
something short. The difficulty is that earning power is not 
rightly viewed as independent of supply. On the contrary, 
the earning power of any one item out of the supply is very 
obviously influenced by the volume of this supply. The 
greater the supply, the lower must fall the rental in order 
that all be rented. This rental in turn is lower because, with 
the larger supply, the earning power of each item of the 
supply is a smaller earning power. 

Cost and capitalization complementary doctrines. — But 
precisely by this door is our exit from the difficulty : pre- 
cisely through this fact is the reconciliation achieved and 
the harmony made complete. Cost affects price by affecting 
rent. It is by the cost that the supply is explained, by the 
supply that the rents are explained, by the capitalization 
of these rents that the price-demand is explained. Cost 
and capitalization are therefore not antagonistic, but supple- 
mentary, doctrines in the theory of price. Neither doctrine 
alone suffices for the explanation of the price of any durable 
good. 

Durable consumption goods. — It may be taken as clear 
that a rent upon a consumption good for a limited period of 
time is, in the main, to be explained on the same principles 
as the market price of any immediate consumption good. 
With either sort of good, this price is affected on the supply 
side by the offered volume of goods. So far as the cost of 
production of any good enters into the case, it is through the 
elasticity of the supply under cost of production influences. 
When the supply is thus elastic, the cost of production is 



CAPITALIZATION VERSUS COST 213 

the explanation for the volume of the supply — the scarcity 
aspect of the problem. On the demand side, the analysis 
appeals to the sequence from utility to marginal utility, 
thence to comparison of marginal utilities, thereby finally 
arriving at the different price offers of the different intending 
purchasers. 

That the services of long-time consumption goods are, 
by the very fact of the remoteness of some of their services, 
different in some respects from the services of immediate 
consumption goods, needs no further emphasis. Note again, 
however, that there is, for every long time consumption good, 
as for every immediate consumption good, a price-demand 
schedule and a supply-price schedule. When once this de- 
mand schedule and this supply schedule are arrived at, the 
method of adjustment of demand and supply into a price 
equilibrium is the same for both classes of goods. There 
are buyers' surpluses and sellers' surpluses in either case. 
As some consumers would, if necessary, pay more for a loaf 
of bread, or a banana, or a pound of meat, or a ton of coal 
than they are forced to pay, so some buyers would pay more 
for a house, a chair, a hat, or a tennis racket than the price 
actually imposed. The price demands are many and differ- 
ent in either sort of demand schedule, and plot equally for 
either case into a falling price-demand curve. Equally for 
either, the market price is to be presented as the point of 
intersection of the curves of demand and supply. 

Durable production goods. — Superficially viewed, the 
{ietermination of the market price of the use of a long-time 
" production " good would appear to follow the same analy- 
sis — on the one side a limited supply, on the other side a 
demand upheld and explained by the fact that the good 
affords a gain-rendering service. And, in truth, so far the 
same analysis really holds for both classes of goods. Never- 
theless, there are supremely important differences between 
the problem of prices for consumption goods and the prob- 
lem of prices for production goods. With each immediate 
consumption good there is a demand curve, or schedule, 
which is fixed for the case and for the time. If the supply 



214 THE ECONOMICS OF ENTERPRISE 

is increased, it must be marketed further down upon the 
demand curve or column. With a smaller supply, an un- 
changed demand absorbs the offerings at a higher level. The 
demand, however, does not change with a change in supply, 
but only the number of purchases made. It is indeed a 
vicious usage to speak of the elasticity of demand, or of 
demand rising with a smaller supply, or falling with a larger 
supply. It is merely the purchasing or consuming that is 
elastic, not the purchasing or consuming attitude : the de- 
mand curve cuts the supply curve at a different point of 
intersection, but it is the same demand curve. 

Changing supply modifies the conditions behind demand. 
— But with production goods, whether of the immediate or 
of the durable sort, this fixity of the demand curve does not 
hold. The demand is motivated by the prospect of gain 
from the production goods. With any change in the supply 
of them there comes a change in the total return trom them, 
and in the return from each item of the supply. The gain 
significance of each item of goods upon which the demand 
rests, changes, therefore, with every change in the supply. 
Lands, machines and men have commonly various fields of 
production open to them. Thus, the very increase or de- 
crease in the supply implies and necessitates an attendant 
change in the volume of the deniand. The ordinary demand 
and supply formula — entirely accurate for consumption 
goods — is therefore applicable to production goods only 
as subject to the recognition of certain very important 
distinctions. 

For example : do we, in fact, know that just as an increase, 
in the supply of wheat or of shoes or of automobiles or of 
houses will depress the price, so must also an increase in 
the supply of laborers lower the wage, or an increase in the 
supply of land or of plows lower the rents? Can it safely 
be said that, with more laborers or with more machines, the 
wages or the rents must fall? Or, if there be a fall, can it 
be foretold how rapid this fall must be ? If the labor supply 
in any one industry were halved, would the individual wage 
be doubled? With a consumption good, surely, the price 
per item, or even the aggregate price, might more than double 



CAPITALIZATION VERSUS COST 215 

with this restriction of supply, were the commodity one of 
a very inelastic consumption. But is it possible that, if 
the number of laborers were twice as great in the aggregate, 
the average individual wage would fall by one half? This 
would involve the assumption of an unchanged aggregate 
result in valuable goods. In point of fact, this unchanged 
aggregate result is not certain, or probable, or even possible. 
Inevitably the aggregate product must be greater. And if, 
concurrently with this increase in the aggregate supply of 
labor, there went also a corresponding increase in the supply 
of land and of other equipment, there would be no need that 
wages fall. There would be, indeed, no possibility of fall, 
since there is excluded, by assumption, the possibility of less 
favorable proportions between the labor and the other fac- 
tors of production cooperating with it. And with the labor 
doubled and the other factors remaining stationary, there 
is still an increase in the total product of goods to be dis- 
tributed among the different cooperating factors ; but clearly 
the aggregate product cannot fully double, since only one 
class of factors of production is doubled. In order to double 
the products, all of the cooperating factors of production 
would need to be doubled. The per capita income of labor 
must therefore fall, if it be only the laborers that have 
doubled 

Changing relations of factors. — This is merely to extend the 
application of a principle already established in the discussion of 
Rural Rents. Fundamental to the analysis is the law of the Pro- 
portion of Factors. A change in per capita product does not meas- 
ure all the change which may befall any one distributive share out 
of the aggregate product. Not solely the amount to be divided 
may change, but the terms of the division. We have seen that, as, 
with increasing population, a less favorable relation comes to exist 
between the number of human beings and the productive equipment 
at their disposal, — that is, as production is driven to utilizing the 
poorer grades or the lower productive powers of the soil, — the ratio 
of total product to the number of producers is a less favorable ratio. 
The per capita product suffers by the fact that the number of laborers 
has, say, doubled, while the other factors of production have fallen 
short of this rate of increase. To double the product there must 



216 THE ECONOMICS OF ENTERPRISE 

have been a doubling of the aggregate productive power. If it is 
the labor factor that has increased, the social dividend is smaller 
relatively to the number of wage claimants; the divisor increases 
faster than the dividend, with bad effects upon the quotient. But 
the point now especially demanding emphasis is that this does not 
report the whole case : there is another and equally important 
aspect. The distribution of the aggregate product must be taken into 
account. Land rents are a constantly increasing share out of 
this diminishing per capita product. The landlords are gaining 
out of the aggregate dearth. Wages suffer, therefore, from two 
causes : a smaller per capita product, and less favorable terms of 
division. 

The same principle may be illustrated in reverse order: the 
Black Death may be taken to have swept away one half the popula- 
tion of England — leaving unimpaired, however, the supply of land 
and of other productive equipment. It thereby became possible 
for the remaining population to enjoy the advantages of a better 
per capita equipment of land and appUances — a better propor- 
tion between labor and its complementary productive goods. 
The result must be a higher net wage, derivative in part from the 
higher per capita output, in part, from the smaller fraction of this 
output apportioned as rent to the owners of the land 

Different analysis for different durable goods. — : Thus 
the problem of the rents and hires of gain-rendering factors, 
while still a price problem in every case, calls for more than 
the usual analysis applicable to consumption goods, whether 
durable or immediate, and carries the analysis into some of 
the more intricate problems of distribution. The process of 
the determination of rents and of wages is intelligible only 
when viewed as part and parcel of the distributive analysis 
under which these remunerations are fixed. An individual's 
demand for a gain-promising good depends upon the increase 
in price product which the good promises for him. The 
market rent of this auxiliary in his effort at price gain — 
its distributive share — is established as the outcome of a 
distributive process — a process apportioning to it a share 
out of the value produced by it in cooperation with other 
gain-giving factors. 

No specific efficiencies. — But again, let it be noted that there is in 
this analysis no warrant for the conclusion that any factor at pro- 



CAPITALIZATION VERSUS COST 217 

duction has any specific and definite utifity or efficiency proper to 
it, but only that to each competing bidder it has its separate signifi- 
cance for gain. Since the entrepreneurs are different, there goes a 
different significance for each different entrepreneur. 

Nor is there better warrant for the inference that the gain effi- 
ciency is a separate and distinguishable efficiency even to the indi- 
vidual entrepreneur. All of the different distributive shares are 
awarded through the competitive bids of entrepreneurs, each of 
whom is able to estimate the significance to him of the good for his 
purposes of gain, — that is, to tell what it would be worth his 
while to pay rather than go without the good. But this is not to 
ascribe either a specific or a separate gain-power to the good. (See 
Chap. X.) To all but the marginal renter or hirer, the advantage from 
having the good is greater than the price. All but the. marginal 
man would pay more if they had to. And for him, in truth, what he, 
as a maximum, will pay, tells not how much gain the added good 
causes, but rather what his aggregate complex of goods, inclusive of 
the good in question, will afford him of gain more than he could 
achieve without it. A reaper minus its blade will harvest nothing. 
To add the blade, and to get the harvest, affords no sufficient basis 
for ascribing the whole harvest to the blade. 

Summary : Earlier chapters have made it clear that cost of 
production bears on price only so far as it bears to explain 
supply; that demand has always to be taken for granted, 
supply being then valid as explanation only in the sense of 
serving as the next succeeding step. 

But even so large a function as this can be ascribed to cost 
of production only for the prices of immediately consumable 
goods. With durable goods, either of the production or of the 
consumption sort, further supplementation is required; the 
capitalization process must be appealed to. But the capital- 
ization process is not rightly to be regarded as applying ex- 
clusively either to the demand or the supply side of the price 
equation. Unless as supplemented by the capitalization 
process, neither term in the equation is adequate to its func- 
tion. With durable goods, each term, in fact, reacts upon the 
other in a way entirely peculiar to this class of goods. This 
interaction takes place through the process of capitalization, 
which thus becomes in some sort an intermediate term in the 
equation. True, cost of production fixes the supply and de- 
termines the reservation prices. But what fixes the demand 
prices ? These are derivative from the future earning powers, 



218 THE ECONOMICS OF ENTERPRISE 

which are in turn derivative from the volume of the supply. 
But these future earning powers do not directly take the form 
of bidding prices for the goods. The capitalization process 
is the sole method by which these future facts transform 
themselves into immediate paying dispositions. 

The next step in the argument will therefore concern itself 
with a detailed examination of the process of capitalization — 
a process which thus far in the discussion has been taken mostly 
for granted. The foUov/ing chapter will show that the ex- 
planation of the price of every durable good involves an ap- 
peal to capitalization ; that all durable goods are capital pre- 
cisely because they depend for their price upon this process — 
a process which in its very nature involves an interest factor ; 
that given future incomes, and therewith discount, or interest, 
rates, there emerges capital, and that anything so emerging 
is capital ; that it is nevertheless a misconception of the prob- 
lem to interpret the process as involving tnarket items of in- 
come or of rental, and market rates of discount to apply to 
them ; that, as all bids in the demand schedule are individual 
bids, the data and the processes by which these l)ids are ar- 
rived at must also be individual ; that the mechanics of price- 
fixation are the same for all the different classes of market- 
able goods — a demand schedule and a supply schedule and a 
market price as the point of intersection; and that therefore 
the capitalization process must underlie and determine all the 
items of reservation price in the supply schedule and all the 
items of price-offer in the demand schedule — -the entire 
process here, as everywhere, requiring a thoroughly individ- 
ualized analysis. There is neither need nor room for the 
social organism in this particular field of doctrine. 



CHAPTER XV 

CAPITALIZATION, THE PROCESS BY WHICH FUTURE INCOMES 
REACH A PRESENT WORTH 

Future service. — Enough has, perhaps, been said as to 
the basis of the compensation paid for the time use of agri- 
cultural lands or machines or durable consumption goods 
or residence lots or residences or pianos or chairs. And it 
has been sufficiently shown not to matter to the actuality 
of the earning powers of goods whether they remain in the 
hands of the owner or be rented out by him for hire. In the 
one case, he receives an income in valuable services ; in 
the other case, an income in money. 

It has also been made clear that while some goods render 
only one service, — and that a future service, — with most 
durable goods the value is dependent upon the power of 
rendering a series of services. But in any case this value 
is reflected to the present from these future services, and 
depends upon them in precisely the same way as the value 
of an immediate consumption good depends on the ability 
of the good to render its immediate service. Lands do not 
earn rents or render services because they are valuable, but 
they are valuable because of the power to earn. Milk or 
butter is not valuable because the cow is valuable, but just 
the other way abQut, — " By their fruits ye shall know 
them." 

Time perspective. — We have already investigated the 
relation of the supply of goods to the earning power of these 
goods in the hands of different individual bidders, and have 
likewise investigated the relations of the different bidding 
dispositions to the fixation of the market rentals of the 
goods. There are, however, some extremely important ques- 
tions yet to be examined : If an object will give a; of pleasure 

219 



220 THE ECONOMICS OF ENTERPRISE 

now, and precisely the same x of pleasure in the future — 
will men prefer it now or later ? and how far ? and when and 
why? 

With some goods, and for some men, the very fact that 
the service is not available now, but is only later to become 
available, is a reason why the particular good in question 
suffers in present importance. Whether this is necessarily 
and always true, or is true only in the balance of cases and 
for the larger number of goods, we need not now discuss. 
Whether, indeed, it would be true of money, — suspended 
purchasing power in general — would be an open question, 
were it not for the pecuniary organization of society and for 
the opportunities for gain which attach to the immediate 
possession of money or currency. If observation shows that 
goods purchasable later at no appreciable change in price 
take on a lower present price, accordingly as the service is 
more and more remote from the present, all this may possibly 
enough be explicable through the simple and obvious fact 
that present money commands a premium over future money. 
It is not necessarily to be inferred that future goods other 
than money suffer on their own account a discount rela- 
tively to present goods. 

But however this may be, — and probably nobody ac- 
curately knows or ever will know, — the actual society and 
the men in it are in the money economy. Remote goods are 
likely not to command as high a present price as do present 
goods. So much is clear; so much must be admitted as 
true in the large and in the general average, even though the 
exceptions should seem to be numerous. Many of these 
exceptions, however, are a mere seeming. For example, it 
will not do to say that keeping ice from winter to summer 
is a case illustrative of a larger value in the future good as 
compared with the same present good : winter ice and sum- 
mer ice are not one good, but two. So wheat is stored from 
fall to spring and apples from the fruit season to the dry- 
fruit season, because of changing conditions attaching 
changes of significance to the goods in question. So, other 
goods are preserved from the time of abundance to the 
time of dearth ; so savings are made for the needs of 



CAPITALIZATION A PROCESS 221 

old age without any necessary attention to the rate 
of interest. But if a case could be presented for choice, 
free from any disturbing influence of changing objec- 
tive fact, or of changing individual need, or of changing 
individual provision against need, and offering only one 
point of difference, the mere difference between now and 
then, and if every complication of monetary competitions 
and monetary interest were excluded, — whether in this 
assumed case the present service would, with the average 
of men, outweigh the future service in appeal to present 
choice, is something which we are not likely ever to know. 
This perspective in favor of the present is clear with some 
human beings ; children manifest it often, perhaps gener- 
ally ; with savages, at all events with some of them, it ap- 
pears to be characteristic. But the contrary disposition is 
not rare among men, even where the future makes no especial 
demand as a matter of mere safety. For anything that we 
know, the balance with the average of men may be in favor of 
the future and its needs as against the present and its needs. 

Time perspective with money. — What we do, however, 
seem to know, is that, when rendered over into the denomina- 
tor of price, a future desirable fact commonly suffers in 
worth as against a present fact objectively the same. The 
rule holds clearly enough for future dollars as against present 
dollars, and for all cases where the present and future are 
submitted to the dollar denominator and the dollar calculus. 
The thing remote in time, when subjected to the money 
statement, suffers in the perspective of desire when rendered 
into a present money statement, very much as things dis- 
tant in space suffer in the visual perspective. One is disposed 
to pay less money for the thing which is to be enjoyed not 
now but then. On any other terms than of a saving in 
present outlay, one prefers not to buy now but later. The 
year-off service has indeed a present money value, but a 
value which is less by virtue of the year of distance. There 
is a weakening of the disposition toward money payment — ■ 
a time discount in money. 

The rate of price discount. — But how great is the money 
discount ? To point out that a good will, a year hence, ren- 



222 THE ECONOMICS OF ENTERPRISE 

der its unique service does explain why the good commands 
a present price, but gives no basis of telling just what this 
present price is to be, or why it is not greater or less than it 
is. Nor is it sufficient to know now, were this possible, what 
one would now promise to pay a year hence for the service 
then. Still less can one person's total of price in the present 
be directly deduced from a prospective series of services or of 
incomes scattered over many years. What you would to-day 
bid for the assignment to you of the right to receive one hun- 
dred dollars a year from to-day, is obviously to be arrived 
at only with knowing the degree in which, for you, the future 
money is depreciated or discredited or discounted, in terms 
of present money, by this fact of futurity. What is the 
rate at which, in terms of present dollars, the future dollars 
suffer in your estimation? What is your angle of perspec- 
tive? On what basis of computation do you translate the 
year-away fact into a present equivalent? What is the in- 
terest rate by which, in your personal discounting process, 
you place a present worth in dollars upon a sum of future 
dollars ? 

The individual problem. — Note accurately what we have 
before us as our present problem, and precisely what are 
the terms involved in it. We are dealing (1) with the money- 
bidding disposition of a particular individual ; (2) with a 
definite sum of money — say, 100 dollars — to be received 
at a definite future time in one payment ; (3) with the rate 
of discount applied to the case by this particular individual. 
The amount, the date, and the rate all being known, all is 
known that is necessary for deducing the paying or bidding 
disposition of the particular individual. But note also that, 
in so far as this $100 is not certain but contingent, there is a 
further allowance to be made, an allowance which must differ 
with different individuals. Men differ widely in the dis- 
position to accept risks and in the appraisal which they apply 
to risks. 

If, however, the case in hand is one, not of a sum of money 
payable at one time certain, but a series of sums payable 
each at its respective time, an annuity, the problem measur- 
ably changes, though not in its essential aspects. The in- 



CAPITALIZATION A PROCESS 223 

dividual's bid appears now to be more like a composite 
or total of a number of different present worths. One 
man may especially favor the early installments and 
give them a relatively high present estimate in mak- 
ing up his total bid, the while regarding the remoter 
installments less cordially and subjecting them to a more 
severe marking down. Other men may, for reasons peculiar 
to their situations or dispositions, discredit the earlier pay- 
ments at a higher annual rate than the later. Some invest- 
ors are looking for long-time loans and some for short. 
Each individual has his own peculiar limitations upon his 
total immediate fund for investment, — his own peculiar 
stress of present need, his own peculiar forecast of the time 
and amount and severity of his future needs, his own pe- 
culiar prospects of future plenty or of future lack. But 
each arrives finally at his total present bid for the series of 
payments, the annuity under consideration. And equally 
whether the annuity is one involving hazards of repudiation 
or is free of all taint of contingency, the different individuals 
must always be differently affected, because of the difference 
in the importance attached to safety, or of the difference in 
disposition or ability to accept and carry risks. 

Durable wealth as annuity-bearing. — It is evident that 
a government bond amounts to a long-time or to a perma- 
nent annuity. Corporate bonds promise a series of annuity 
payments, ending with the payment also of the principal 
sum. Corporate stocks are of the same general nature, only 
that the aspect of contingency is much more pronounced. 
All of the foregoing render their incomes — so far as there 
are any — in terms of future money, and present the prob- 
lem of reduction to terms of present money. The objective 
fact of money income to be received is the same for all of 
these investments ; in this aspect there is no room for in- 
dividual estimates or interpretations. In this regard, all 
stand on the same and ultimate basis of future dollars, 
to be transferred into present dollars. Thus the different 
bids — and different bids there inevitably will be — must 
find their explanation in the differences of opinion as to the 



224 THE ECONOMICS OF ENTERPRISE 

degree of hazard, or in the differing dispositions to operate 
in hazards or, finally, in the different ratios by which future 
dollars that are certain suffer depreciation when rendered 
over into terms of present dollars. 

Not so, however, with respect to the income from other 
kinds of durable wealth. A dwelling house, a horse, a pic- 
ture, a piano, a farm, is a bearer of rent, and the purchase 
of it is in essence the purchase of an annuity, a series of in- 
comes. But commonly the earning power of the instrumental 
good, or the service from a durable consumption good for a 
given period of time, differs with different men. One man 
can make a particular instrumental good signify appreciably 
more than can another man. Differences of equipment 
already in hand may be important here : A sheep farmer 
does not need a dairy farm ; the man with no carriage wants 
no horses ; another man may need a horse, but only a horse 
precisely matching one that he has already. Likewise, a 
particular picture or piano may quite suit the tastes of one 
man, or may, in quality of service, be especially well suited 
to the limitations of his purse or to the size of his fund avail- 
able for the things of art, or may especially well, or especially 
ill, harmonize with the tint of his wall paper or with the 
style or color of his furniture. All sorts of influences are, 
then, to be recognized as effective in varying the money 
rentals attributed by different men to the same objective rent- 
bearing fact. And, in the degree that the influence in ques- 
tion affects the prospective income in terms of money, it 
inevitably affects the bids of prospective bidders and the 
reservation prices of prospective sellers. And it is only as 
bearing upon these present money worths that any of the 
influences under analysis — fixed money income, contin- 
gent money income, estimated earning power, quality and 
kind of satisfactions promised, each individual estimate 
placed upon these, the different individual provisions of 
purchasing power, the different individual fields of alterna- 
tive investment or of alternative expenditure — may come to 
bear upon the prices which the market attaches to any 
good as the present and aggregate worth of its entire series 
of future valuable services. 



CAPITALIZATION A PROCESS 225 

What influences affect the various bidders' bids. — The truth, 
then, is that it is only in point of the influences lying behind the 
different bids in the demand schedule and determining these bids, 
that the theory of price for durable goods differs from the ordinary 
price theory, or makes addition to it, or modification of it. The 
view, here presented, must, however, be admitted^to diverge seriously, 
at some points, from the currently held doctrine of the precise nature 
of the capitalization process. Thus for a thorough understanding 
of the issues involved, the generally accepted doctrine must be 
presented. 

First, however, it is to be remarked that the contrasted views 
are in essential harmony to the extent of holding that, in a large 
and general way, some sort of capitalization process must be ap- 
pealed to in the explanation of the present worth, — the cash price, 
— of any sort of durable good, and that there is one and the same 
process for durable production goods and for durable consumption 
goods. The points at issue have to do with the precise nature of 
this process. 

The current view. — Put shortly, the view which is currently 
received holds that, with passing time, there accrues upon any 
durable good — a house or a machine, for example — a market 
rental, say of $100 a year, for a certain term of years. If the rentals 
or hires are 10 in number, the present worth is reached by discount- 
ing, at the market rate of interest proper to the case, each of these 
payments into a present market price. The market price of the 
property is the sum of the present worths of these future market 
incomes. If a property promise an unending series of rentals, the 
price will be that sum of money which, put at interest at the ac- 
cepted capitalization — or discount — rate, will annually produce 
the rental under consideration. Thus, no matter what influences 
may be behind the determination of the respective rents of produc- 
tion and consumption goods, these rents, when once determined, 
fall under one and the same capitalization process in attaining to a 
present worth. So, if the rent of a house or a farm or a machine, 
after allowing for upkeep and repairs, is |100 annually, the market 
price in a 10 per cent country will be $1000. With an unchanged 
annual earning power, as rent or hire, but with the interest rate at 
5 per cent, the same property will be worth $2000. 

The points at issue. — Note now that fundamental to this analysis 
is a market rental and a market rate of discount. If the good is not a 
rented good, appeal is made to what the good would command as a 
market fact at the market rental. 

No question can be made that goods do command — many of 
Q 



226 THE ECONOMICS OF ENTERPRISE 

them — market rentals, and that most other goods valuable to the 
owner would, if rented, command such rentals. Nor has the prob- 
lem of the distributive process by which these rents are imputed 
to the goods any necessary part in the capitalization analysis. 
Doubtless there are such market rents. But the point is that 
these market rents are not the rents with which the capitalization proc- 
ess has to do. The view contended for diverges, then, from the 
accepted view in two respects only — in holding (1) that not one 
market earning power, but the different earning powers to the dif- 
ferent individuals, most motivate the respective individual price 
offers ; (2) that not the market rate of discount, but the different 
rates of discount of the different individuals, must be the rates 
— if any rates there are — by which the respective earning powers 
are discounted into the different individual price offers. 

These issues should be clear, and, if clear, should be readily re- 
solved. The question really is, what lies behind the individual 
farmer's disposition to pay, say, |200 for a harvest machine. This 
farmer's minimum price offer stands as a $200 demand item in the 
aggregate demand curve. Why? Is it that this machine rents, or 
is rentable, at $10 net per year, and that the market rate of dis- 
count is 5 per cent? It may equally well be true that for him, upon 
his particular farm and in his peculiar circumstances, a harvester 
would count for an added gain of $20 per year ; but that, at the 
same time, the sum to be invested is worth to him 10 per cent if he 
owns it, or would cost him 10 per cent were he to borrow it. 

With durable consumption goods also, the argument is parallel. 
Men are willing to offer for things as a maximum what they think 
they can afford. But what is it to " afford "? As with goods im- 
mediately consumable, wheat or butter or stove wood, so also with 
durable consumption goods, there are as many different paying 
dispositions as there are different men. All of these different paying 
dispositions, say for stove wood, are items in the demand column. 
Commonly, in fact, an individual has several different price offers 
for different increments of supply ; that is to say, the individual's 
different price offers appear at different points along down the de- 
mand curve or column. The price of the wheat or of the butter or 
of the wood is the equating point between the whole supply of it as 
over against all the different price offers bearing upon it. In short, 
there must be recognized for immediate consumption goods, for 
durable consumption goods, and for durable production goods, 
a price offer schedule, a demand curve, made up of many different 
price paying dispositions. It will not do to assume that any dur- 



CAPITALIZATION A PROCESS 227 

able good has one single demand price for all intending buyers, 
deduced from one single rental value, and subjected to one single 
discount rate in arriving at a market price. 

It is in this aspect that the earlier analysis of the process by 
which a market rental is imputed to a productive good is to our im- 
mediate purpose as making clear that the productivity to different 
entrepreneurs is a different productivity. Assuming an aggregate 
supply of goods, each item of which controls a series of valuable 
services for each individual entrepreneur, and subjecting these 
different incomes of service to the different discount rates of the 
respective entrepreneurs, we are in possession of the data from which 
the different demand prices of the different entrepreneurs and the 
reservation prices of the possessors are deduced — the key to the 
derivation of all the different demands bearing upon the supply. 

The current doctrine unprecise. — The analysis here offered im- 
ports, therefore, no denial of the vague general truth at the heart of 
the doctrine of capitalization now under criticism — a doctrine not 
so much wrong in essentials as inaccurate and incomplete in its 
details. Its defect is that it speaks in general averages or, possi- 
bly, conceives society to be an economic organism, or, perhaps, 
adopts the attitude of the broker or speculator who, rightly for 
his purposes, computes the value of any share of stock according to 
the income rate which it renders, subject to a discount rate express- 
ing the earning power of investments in similar stocks. The broker 
applies, in truth, a very simple and entirely adequate, but a purely 
representative and secondary, method of arriving at his own dis- 
count rate. He has no concern with the forces determining the 
various personal discount rates of the various purchasers of the prop- 
erties he offers for sale — just as the merchant is not concerned 
with the volume or the size of the marginal utilities between which 
the individual consumer must choose in arriving at his demand 
price for any particular consumable good. The actual market 
situation affords data enough for the purposes of either of these 
middlemen. — Our concern, however, is with the processes of the 
ultimate investor or consumer. 

Both views over-rationalized. — But the truth probably 
is that, excepting in those cases where specific future money 
incomes are rendered over into a present money worth, either 
of the contrasted views is about equally open to criticism. 
Both seriously err in an extreme over-rationalization of the 



228 THE ECONOMICS OF ENTERPRISE 

psychological process involved. How far, indeed, does the 
individual actually proceed in his logical analy.sis of the 
situation, and what does he actually do in deciding how much 
money he can afford to give for some particular long-time 
consumption good, say a piano? There are other ways in 
which he may use his $500 ; if he does not buy the piano, he 
will presumably scatter his S500 among a wide range of little 
things. His choice in such case lies between the aggregate 
utilities of these many and indefinite things, as over against 
a vague vista of piano utilities. There is no need for a greater 
rationality in the case than that he realize the quality proper 
to the dollar everywhere — that it can be spent only once, 
and that he make a choice declarative of which line of alter- 
natives attracts him the more. If the prospective buyer 
of the piano is in debt and is paying interest, or if he is at 
choice between an investment for gain as against the pur- 
chase of the piano — if, that is to say, the piano vista of 
services is set over against a money magnitude and an in- 
terest gain — is there any need that the series of services 
controlled and promised by the piano be subjected each to 
its future valuation in terms of a price statement as of a 
specific future time, and then that each be rendered over 
into a price worth in the present, and thereupon a total of 
these separate worths be arrived at as the aggregate present 
worth of the piano ? This would certainly be one way of capi- 
talizing, but is it the only way, and is it the actual way? 

The principle of present worth. — What, indeed, is the 
principle of the entire doctrine of present worth ? One thou- 
sand dollars, due one year from date, is, as a present worth, 
merely the amount of money which, put at interest at the 
assumed rate, will in a year amount to 1000 dollars. So, again, 
the present worth of a permanent annuity is that sum of money 
which, put at interest at the assumed rate, will return the 
annuity payments. If the interest rate is taken at 6 per cent, 
a permanent annuity of 60 dollars is worth 1000 dollars, 
because 1000 dollars at interest at 6 per cent will give a 
yearly return of 60 dollars. This is what present worth 
means, and this is all that it means — the equivalent in cash 
of an item, or a series of items, of future income. 



CAPITALIZATION A PROCESS 229 

In the light of this principle, what shall a man pay in 
cash for a series of services extending into the future ? The 
outside limit is evidently reached when the point comes at 
which the same sum can be equally serviceably used in the 
purchase of other goods, or in gainful investment in some 
direction commanding an equally desirable money return. 
The ultimate principle in the case is really a simple appli- 
cation of the doctrine of opportunity cost. If the choice 
actually lies between the piano and the placing of the money 
at interest, the piano will be purchased only when its pro- 
spective services are as attractive as the prospective returns 
upon the investment bearing the money return. To pay 
500 dollars for the piano implies that the present importance 
attached to its series of prospective services is not less than 
the importance of the 500 dollars in its alternative applica- 
tion as an investment promising a pecuniary return. 

A present thing desired now for its future service has 
present utility. — Recall that any bidding or paying dis- 
position expresses a choice between competing utilities and 
is a declaration in favor of that one bulking the greater in 
the present estimation. Recall also the meaning of utility 
in its strict economic significance : it is the strength of the 
appeal to choice ; it expresses merely the fact that a thing 
is wanted. To say that a thing has great utility is merely 
to say that it is wanted greatly, that it evokes a strong in- 
tensity of desire. Accurately, we do not want things because 
they have utility, but their utility is merely this very fact 
that we want them. To say that the utility is the cause 
of the want, or that we desire things because they give us 
pleasure, is essentially repetitive ; as well say that some- 
thing hurts us because it pains us, or that fire burns us because 
it is hot to us. So to assert that things will later satisfy a 
desire — that we shall some day want them, that we now 
see that they will some day be desired — is equivalent to 
saying that they are now desired, that we do now want 
them, that they now have utility. For the purpose, there- 
fore, it means nothing to inquire whether a future good is a 
present good, whether the thing of appreciated future serv- 
ice has present utility, or whether, instead, it merely prompts 



230 THE ECONOMICS OF ENTERPRISE 

a present estimation of a future utility. If the future serv- 
ice calls forth a present desire to have the thing, the thing 
has utility now ; a present want exists for it : it evokes a 
present desire. The degree in which the future service 
excites the present want is the degree of the present utility. 
The discount principle connotes, then, merely the degree 
in which the remoteness of the services detracts from the 
intensity of the present want — much if much, little if little, 
and very possibly, in some circumstances, not at all. Only 
in the degree, then, in which remoteness signifies in any par- 
ticular case, if it signifies at all, is remoteness important to 
the present analysis ; and it is then important only as bear- 
ing on the price which will be offered for the remote thing, 
as against the strongest competing opportunity for the use 
of the purchasing power. The importance of remoteness 
is merely in its effect upon the relative strength of the oppos- 
ing present wants for alternative things. 

The present discussion will serve again to emphasize the fact that 
economic analysis need not attempt the solution of all, or of any, of 
the difficult psychological problems connected with the theory of 
desire, and cannot safely commit itself to any particular school or 
method of solution. It is enough for all economic purposes that 
these desires exist, that these wants are with us, that these utilities 
are. We have merely to report the manner of their working as they 
affect the disposition to pay, and thereby affect the fixation of price. 

Our present problem, it must also be noted, is not at all to in- 
vestigate the causes of the prevailing rate or of the different rates of 
interest in the market, or even to investigate the causes of that 
particular rate which is employed by the individual in arriving at a 
present money bid for a future specific money income or series of 
incomes. We have merely at present to distinguish clearly the 
terms of the problem, (1) the rents or the payments to accrue, and 
(2) the degree of discount to which these are subject, separately or 
together, in getting them into an individual's present price bid. 
And together with this, we have to make clear the substantially 
similar process, as it applies to those other long-time production or 
consumption goods to which the same definiteness of income does 
not fully attach. And to this end, we are compelled to recognize 
and emphasize the fact that interest and discount are, in their strict 



CAPITALIZATION A PROCESS 231 

and limited sense, phenomena which belong solely to the price econ- 
omy and are proper only to money relations. They are competitive 
phenomena in the price regime. To render a future money pay- 
ment over into a present money worth is essentially a discounting 
process in the strictest sense of the term, even though the process 
presents itself as merely the determination of what sum of present 
money is of equal desirability with the future services in prospect, 
— even though, that is to say, no definite discount rate and no pre- 
cise method of computation attend the process. The facts of the 
case, and all the necessary psychology of it, are summed up in the 
conclusion that the bidder can be prevailed upon to offer only 
this much now for that much then. Possibly enough, he has no 
reason beyond the fact that there are open to him alternative 
opportunities of investment, which alternative opportunities may, 
in turn, be equally unspecific in their mathematical relations. Nor 
is even this much to be asserted of the process by which he arrives 
at his present buying disposition, say, for a piano. This piano 
will forthwith enter upon its career of recurrent and frequent, — 
though irregular, — offerings of service. Were the alternative to 
the buying of a piano the renting of another piano — at, say, 3 
dollars per month — ■ he might, it is true, arrive at the decision to 
purchase through some more or less distinct use of a mathematical 
process of discount. But renting may well be impossible or not in 
contemplation ; in that case, one plainly does not attach a future 
price to each one among all the long series of future valuable — but 
not separately valued — services, and thereupon proceed to dis- 
count each of these separately priceable items of service into its 
present worth of price, and then proceed to make up his total bid as 
the sum of these different and separate present worths. If this is 
really the logic of the case — ■ the implicit logic carried out to its 
ultimate reach of care and rationality — it surely is not the actual 
psychology of the process. And yet, if the discount process in 
this separate and exhaustively logical aspect is really involved, it 
must have to do with these future facts in their price-reported 
aspect. Nothing but a future value or price can be discounted 
into a present value or price ; nothing but a price can be reduced by 
a certain per cent to yield a price remainder. 

But this precise sort of discounting is not what actually takes 
place. And note again that the problem in its present formulation 
does not involve the question of the fixation of the bidder's interest 
rate, or any question as to when, where, and how he gets this interest 
rate, but rather the question whether he actually has an interest rate 
for the purposes of the problem. Doubtless he may, and probably 



232 THE ECONOMICS OF ENTERPRISE 

does, attach some more or less definite significance to the use of his 
funds for purposes of gain, whenever he has a gainful use under 
consideration ; he may truly have and recognize alternative pos- 
sibilities of gainful investment for price results ; or he may be so 
pressed by his other wants as to have a certain general level of effec- 
tive protest against the piano direction of outlay. This much must 
be admitted. And surely he does somehow or other decide that he 
will or will not purchase, and up to what level his price offer 
may go. But, equally clearly, he does not arrive at the decision by 
the use of any series of separately valued services of the piano as 
the basis for his price offer. 

The capitalization theory in either of the contrasted views is, 
then, susceptible of an interpretation which, if seriously held, would 
carry the logic of the capitalization process to a point of precision 
and coherence of which it is mostly innocent ; rightly indicating the 
character of the process so far as it goes, it would then project it far 
beyond the reach of its ordinary and actual going. Even, indeed, as 
apphed to ground rents, annuities, and stocks and bonds, the usual 
formulation of the capitalization theory severely strains the terms 
of the individual experience, in purporting to record in precise detail 
the manner and method by which the durable good attains to its 
market standing in terms of price. Subjected, however, to the res- 
ervations and limitations which have been here set forth, the 
theory appears to rest upon a valid principle and to illuminate a 
field of phenomena which otherwise must remain obscure. 



This chapter has discussed the problem of attaching present 
market prices to such goods as promise future incomes. To 
the end of solving this problem it has been shown that the 
phenomena of interest and of discount are essentially one 
phenomenon differing only in the standpoint of time from 
which the fact of increment is viewed ; that in a pecuniary 
society, either is a premium of present purchasing power in 
terms of money over future purchasing power in terms of 
money; that in actual market transfers, all future money 
incomes — or all incomes for which money would be paid 
to have them or foregone to retain them — suffer a discount 
in arriving at a present money price ; that the process by 
which the present price is fixed is the capitalization process ; 
that the present money worth of any future income or of any 
series of incomes constitutes capital; that the change in 



CAPITALIZATION A PROCESS 233 

money worth with passing time is one manifestation of in- 
terest — interest (or discomit), capital, and capitalization 
being therefore correlative terms, and the phenomena in- 
dicated by them, interdependent phenomena; that every 
possession that renders a valuable service remote in time, or 
that earns a series of services accruing with lapse of time, is a 
possession that earns interest, is a possession that gets its 
present worth through the process of capitalization, and a 
possession that is capital to the amount of its present price ; 
that most durable goods render not one future income, but a 
series of incomes; that precisely because all durable goods 
render income which accrues with passing time and de- 
pends for its accruing upon the passing of time, all durable 
goods are subject to the capitalization process and are there- 
fore capital. 

It is further clear that the process of market adjustment by 
which the price of any durable good is fixed is precisely the 
same demand and supply process that has already been 
studied with regard to goods of immediate consumption ; that 
the capitalization process has therefore to do neither with the 
market rentals upon durable goods nor with the market rates 
of interest upon different classes of loanable funds, but only 
with the way in which the possessors of the goods arrive at 
their reservation prices, and the bidders at their offer prices ; 
that, being different men, the buyers differ from the sellers and 
from one another, and the sellers from one another ; that 
therefore there can be no one single series of earning powers 
attaching to any good, which series of earning powers is capi- 
talized into the present market worth of the good, but rather 
that there is a different earning power for each different seller 
and buyer ; that each seller or buyer has also his separate dis- 
count rate and his separate process through which he arrives 
at his individual present worth of any future income, and his 
maximum bid for it ; that therefore individual capitalizing 
processes underlie both the demand and the supply schedules 
of the market process ; and that thus the market process, if 
made both actual and intelligible, is not to be analyzed as a 
social or aggregate or organic process, but must instead be 
strictly and thoroughly individualized. 

And further still : the doctrine of capitalization here pre- 
sented bases itself upon the individual processes lying behind 
the reservation prices of the sellers and the bidding prices of 
the buyers. The analysis must therefore be psychological 



234 THE ECONOMICS OF ENTERPRISE 

rather than logical in emphasis, and must carefully avoid 
interpreting the individual process in terms which, while 
logically possible, are not psychologically actual ; it must 
recognize that behind capital as a present market fact there 
are individual attitudes and processes having to do with both 
a future and a present, and with the relations of future to 
present ; that discount is precisely a process of translating 
the future price items into present price items ; that psy- 
chologically there must therefore be an actual present, and 
incomes which accrue in this present ; that, admitting freely 
that there is no logical present, but only an eternity past and 
an eternity to come, and that therefore there can logically be 
no present incomes, but only future incomes more or less re- 
mote from a present which logically is not, there must never- 
theless be an actual psychological present, merely — if for 
no other sufficient reason — because there are present worths 
and derivative present market prices ; that the process of 
capitalization is the process of getting the psychological future 
into an actual and psychological and market present ; and 
that, in the individual process, only those incomes get capi- 
talized which, being recognized as future, get discounted into 
a present paying disposition. Capital, therefore, does not 
embrace all goods commanding a price — - ice cream for ex- 
ample — but only those goods which, recognized as future 
in some part of their service, involve the process of discount 
in arriving at their present market standing. 

Chapter XVI will show that every contract of deferred 
payment is precisely what the name suggests — a contract 
for future payment as substitute for immediate payment ; 
but that actually, and almost necessarily, the contract runs 
to pay a sum of money, as the agreed equivalent of the sum 
for which the debtor was originally accountable ; that the 
contract of deferred payment is merely an exchange of pres- 
ent price for a promised future price — a transaction in 
money terms, in which the change in the money sum is due 
to the lapse of time between the date of original accountabil- 
ity and the date of the actual payment. The present sum is 
the agreed discounted price of the future sum. Thus the phe- 
nomena of interest and capitalization and capital are all pres- 
ent in every relation of deferred payment. 

Commonly, however, not all of these three aspects are 
specifically set forth in the terms of the contract : in the ab- 



CAPITALIZATION A PROCESS 235 

sence of any specific agreement for the payment of interest, 
the laws or the customs of society attach to every obligation 
to pay immediate money the further agreement that if pay- 
ment is not immediately made, the deferred payment shall 
include a sum in addition to the principal as indemnity to the 
creditor for the delay. 

The chapter will, however, concern itself not with the in- 
terest process by which an equation is established between 
future money and present money, but solely with the pay- 
ment made in discharge of the principal sum ; the problem 
will be to determine the precise nature of the obligation of 
deferred payment with reference solely to the principal sum ; 
to outline the requirements which strict and ideal justice 
would attach to the relation ; the rights which, in order to 
safeguard the interests of both debtor and creditor, the law 
should attach to the contract ; and the nature of the modi- 
fications which the law should read into the contract in its 
making or should impose in its execution. 



CHAPTER XVI 

THE DISCHARGE OF DEBTS : DEFERRED PAYMENTS 

The present chapter will attempt to establish, among others, 
the following propositions : 

(1) That if credit relations are to exist, the use of a standard of 
deferred payments is a necessity ; 

(2) That it is practicably inevitable that the medium through 
which current exchanges take place, namely, money or its equivalent, 
should be the medium in which deferred payments are stipulated ; 

(3) That whether the medium be stable or unstable is important 
only in relations of deferred payment, or in relations essentially 
similar ; 

(4) That money must be a defective standard of deferred pay- 
ments because of its inevitable instability — because, in other words, 
it does not promise an equality between the loan as made and the 
loan as repaid ; 

(5) That neither the instability to be avoided in the standard, 
nor the equality to be sought through the standard, can have any 
reference to value ; nor can this stability or this equality find its 
test in labor or pain or sacrifice, but only in utility. 

Value expresses any one specific exchange relation. — The 
market value of any given thing is the exchange relation in which, 
quantitatively stated, it st^.nds to some other one thing, quantita- 
tively stated — not wheat against corn or hay against pepper, but 
only that so much of a particular grade of wheat buys so much of 
corn of a particular grade — so many bales or pounds of hay of a 
specific sort buy so many pounds or packages of pepper of a 
specific sort. In other words, value reports an exchange relation of 
any one thing against some other one thing. Price reports the rela- 
tion in which some one thing actually exchanges against the 
particular thing used as money. Price, therefore, is one instance 
of value — the exchange relation of any particular good to the spe- 
cific thing money. 

Barter exchange and price exchange. — In a barter economy, 
therefore, all price relations would be lacking. In the money econ- 
omy, on the contrary, all value exchanges must be lacking, excepting 

236 



THE DISCHARGE OF DEBTS 237 

so far as barter lasts over into the new order. But value relations 
must still exist even though value exchanges have entirely ceased. 
Exchanges of one good for another do essentially take place, only that 
they take place through a medium, a price good, a money. Hats 
for money, and money for shoes, amounts to hats for shoes. An 
exchange for money is only the halfway house to a completed barter. 
The actual exchanges in a price economy are of this halfway charac- 
ter. Thus, all value relations must be deductions from actual price 
relations. By comparing the relation of wheat to money, its price, 
and the relation of shoes to money, their price, the value relations of 
wheat to shoes are computed — not actual exchange relations, for 
these are impracticable — but potential relations in the sense either of 
those exchange relations which would exist, did any barter exchanges 
actually take place, or in the sense of those ultimate barter relations 
which the use of a medium of exchange makes easily practicable. 

Exchange media and specialization. — It is obvious that in a 
society lacking any established medium of exchange, division of 
labor and specialization of employnaent might exist very much as in 
the present society. Fairly definite value relations would establish 
themselves between such classes of goods as were in considerable 
measure exchanged against one another. But the absence of a 
system of money and of price would not mean that there would be 
no medium of exchange, but rather that there would be an indefinite 
multiplication of media. By trading and retrading, the possessor 
of any commodity for exchange would finally get possession of that 
particular commodity which he could exchange for the particular 
thing that he wanted. The inconveniences in the barter system 
would inhere in just this necessity of so many intermediate trades 
and in the practical difficulty of working out any particular series of 
these. Each man would then, as his necessities should dicate, be 
employing not one medium, but various different media of exchange, 
as intermediate between his original wares for sale and the consump- 
tion goods which he was seeking ; but these intermediates would be 
different for different men, and different for each exchange problem, 
and different at each of the stages of each separate problem. 

Money exchange. — The need, therefore, of one established 
medium is evident. A money economy means merely that some one 
particular commodity has been specialized to the intermediate 
function and is generally accepted in that function. This general 
intermediate is money ; trades through it are price trades ; a stand- 
ard is thus established ; from the different exchange ratios of com- 
modities to money, their different prices, value relations may be 
deduced for goods that never meet in actual exchanges. 



238 THE ECONOMICS OF ENTERPRISE 

In all trades, therefore, which are not barter trades an intermedi- 
ate must serve as price medium and as standard. Price is merely 
the money quid-pro-quo, the payment side of an exchange. But 
if the payment be not immediate, if credit be granted, in terms of 
what obhgation shall it run ? Inevitably there must be a something 
promised as the thing in which to make payment. The thing actu- 
ally selected is in every case the standard for that case. If the 
exchange had been completed in the present, and at the same time 
were not a barter exchange, an intermediate — a standard for the 
occasion — would have been necessary. So, if the exchange be not 
a barter exchange, and payment be delayed, the intermediate thing 
must be a standard for that occasion. What standard will serve 
this particular need ? 

The standard in deferred payments. — Evidently the very 
thing that was sold can hardly be the particular thing that 
the creditor will desire as payment. A farmer who sells hay 
does not want hay in return; his business is producing hay 
for sale. One ordinarily sells things because he wants some- 
thing else, just as one ordinarily buys the thing that he does 
not produce. And if hay were in fact agreed upon as the 
thing in which payment should be made, the hay would then 
itself be the standard for that case. Wliatever is agreed 
upon as the particular thing in which payment shall be made 
is the standard for that agreement. If the thing sold is not 
the thing in which return is to be rendered, what other 
standard will serve better? The creditor rarely knows 
months or years ahead what particular goods he will turn 
out to need, or the debtor what particular goods he will 
have with which to make payment. Thus that commodity 
is best selected as standard into which the debtor can always 
and easily convert his resources and which, in turn, the credi- 
tor can most easily exchange for what he turns out to need. 
That commodity is money. The same conveniences impose 
its selection as standard of deferred payments that dictate 
its use in current exchanges. In either use it is both inter- 
mediate and standard ; the two functions are, in fact, not 
two, but one. 

The function of the standard. — We may, then, take it 
as established that some one thing, or possibly some one 



THE DISCHARGE OF DEBTS 239 

specific group of things, must be selected as standard in 
any relation of deferred payment. But precisely what 
is the function of this standard? If it work justice between 
debtor and creditor, it must do this by bringing about some 
sort of equality between the loan and its payment. This 
equality cannot, therefore, be an equality in value : for what 
precisely would equality in value mean? 

Equality in price we already know. The actual contract 
calls for this and nothing more. This sort of equality, then, 
requires no definition, however greatly it may stand in need 
of essential explanation. That two things are equal in 
price means merely that they exchange for the same sum of 
money. 

Value is not quantitative. — But is this the same thing as 
saying that they are equal in value ? And in what sense is it 
the same thing ? Obviously, since price is an exchange rela- 
tion, it must thereby be also a value relation; two things 
may have the same price value — may be equal in their 
command of money. But is nothing more than this implied 
in an equality of value ? If a horse exchanges for a cow, 
there is here in the very terms of the case an equality ; the 
horse buys the cow or the cow the horse. But does this 
equality in value imply more than the mere fact of exchange, 
that one thing buys the other ? Is it also asserted or implied 
that the value of the cow is one quantity or sum of value, 
and that this quantity or sum is equal to the quantity or 
sum of value which is in the horse — that horse and cow 
have each a value of its own, characteristic of it, intrinsic in 
it, attaching to it, possessed by it — a quality or attribute, 
a quantitative something, precisely as great as the same 
sort of quantitative something belonging to the other — 
this quantitative equality of the two thus underlying and 
explaining the fact that they exchange one against the 
other ? 

The fact is that value is not a quantity. That the value of 
any one horse is any one cow means nothing and is nothing 
more than the assertion of this fact that the one particular 
horse buys the one particular cow. That two things exchange 
against each other imports no common quality in which 



240 THE ECONOMICS OF ENTERPRISE 

each equally and quantitatively shares, whether utility or 
cost or value — unless indeed it be merely this quality of 
exchangeability implied and manifested in the sheer fact of 
exchange. Take it that this one horse buys this one cow. 
How much quantitatively as an independent thing is the 
value of the horse? If it be precisely as much as the value 
of the cow, how much then quantitatively and independently 
is the value of the cow? As much as that of the horse? 
And if it be found that the horse will also buy a piano, or 
this or that or other third thing, does this in any way help ? 
What, in turn, is the value of the piano ? There is no goal 
in this " infinite regress," but only a recurrent return to the 
original point in the circle. 

Value is actual only as price. — We have already seen 
that market value occurs in the price regime only in the 
one particular manifestation of price, and that value in any 
other sense can record not actual exchanges of goods against 
goods — exchanges by barter — but only deductions or 
computations made possible through actual price exchanges 
— mere derivations and inferences as to what value exchanges 
might take place if only they should take place, or as to what 
value relations may become actual through actual exchanges 
in price. And earlier chapters have made clear also that 
market prices are not proportionate either to the labor or 
the pains or the feeling sacrifices of production on the one 
side, or to the service or utility or gratification in consump- 
tion on the other side, but are merely the equating point be- 
tween the different reservation prices, based on costs in money 
terms, on the supply side, and the paying dispositions of 
consumers, as expressed in money terms, on the demand side. 
Costs cannot be reduced to any common denominator of 
pain, or price offers to any common denominator of utility. 
Nor do costs sum up or report the amount of labor, or even 
the amount of wages, incorporated in the product, but only 
the sum of marginal sacrifices reduced to the common de- 
nominator of price. And similarly on the demand side of 
the price equation : the fact that one will pay, at the maxi- 
mum, say a dollar for a thing — in other words is marginal 
at this price offer — means only that at any higher price 



THE DISCHARGE OF DEBTS 241 

he would prefer to use his purchasing power for something 
else. A marginal price offer implies merely an equality of 
advantage between two competing lines of expenditure, with- 
out suggestion as to the absolute advantages of either. 
Equality in market price indicates solely that different things 
buy equal sums of money, and can indicate nothing more, 
unless it be that their cost prices may have been equal or 
the paying dispositions equal, as affording a possible ex- 
planation that the prices are equal. 

So much as this being accepted, what can equality in 
value indicate other than mere equality in price? The 
market knows, it is clear, no other value equality than this, 
and can imply no underlying qualities that equal prices do 
not also imply. 

Equality in value an empty phrase. — The truth is that, for 
all purposes of economic analysis, not only is equality in 
value over intervals either of space or of time an inaccurate 
or a meaningless and useless concept, but also that, even 
in current exchanges, it is an almost meaningless, and an 
entirely useless, concept. For, to mean anything in any 
one of these relations, this value equality must be assumed 
to be a quantitative equality, and must be worked out 
through a reference to something chosen as a standard and 
therefore also taken in turn to be itself quantitative. 

Quantitative notion criticized : spacial relations. — What, 
for example, would it mean to assert that a horse in America 
has less value than a horse in China ? It may possibly mean 
that a horse is less useful here — perhaps would earn less 
income in silver or gold, or would afford less pleasure — in 
one case a money standard, in the other a vague utility stand- 
ard, but in neither case a value standard. Commonly, 
however, the assertion would mean that the horse would 
exchange there for more money — would command a higher 
price — gold or silver being in this case the accepted stand- 
ard. Or a higher level of command over things in general 
may be the fact in mind. But how should one ascertain 
this higher level of command, excepting as a deduction from 
the prices not only of the horse, but of everything else in- 
volved in the comparison ? And if general purchasing power 



242 THE ECONOMICS OF ENTERPRISE 

be the thing intended, this is not a value test, but a utility 
test. The reference cannot be to things in general in point of 
weight or surface or length or volume, but only to things 
in general in their aspect of serviceability. 

Time relations. — The same impossibility presents itself of assert- 
ing equality of value over intervals of time. To say that a horse 
is worth more now than ten years ago, is to say that it has more 
utility, or that it bears a higher money price — will, that is to say, 
command a larger total and average of things in general, or will 
command more of the one thing, money. In neither case is it a 
value fact, otherwise than in the sense that the command of the 
standard is itself, one instance of value. But it still remains true 
that the quantum of standard signifies merely through its bearing 
on the quantum of things in general. And even to say that the 
horse will purchase more of each and every other thing, were this 
really in mind, would be to assert not a higher value, 1 nit an indefi- 
nite number of higher values. 

In same place and time. — And the same difficulty is really pres- 
ent in the assertion that any one thing to-day has the same value 
as another thing to-day, unless it be true that nothing more is in- 
tended than that one thing buys the other, or that each will buy the 
same amount of some other one thing, or of every other thing, that the 
other buys — in the second case an equality in terms of a standard, 
in the third case a general equality in purchasing power ; and in this 
last case, all things together are, under the utility denominator, 
somehow lumped in to constitute a standard — unless, indeed, they 
are left unassembled as distinct and separate value relations. But, 
even as assembled, this equality in purchasing power with reference 
to everything else at once, can be inferred from only one fact, and 
then only inaccurately inferred, namely, from the fact of equal 
price. It is only against money that all things do in fact exchange. 
We know that a piano of a given grade is worth 1000 bushels of corn 
of a given grade, only by comparing the exchange ratios of the 
respective commodities to money. It would be difficult, and prob- 
ably impossible, to find these two commodities exchanging against 
each other. 

Money has no one value, but only values. — The sta- 
bility of the standard, therefore, cannot be a stability in the 
sense of an underlying value incorporated in money. Value, 
as we have seen, is always an exchange ratio between specified 



THE DISCHARGE OF DEBTS 243 

commodities. A given thing may, therefore, have one price, 
but not one value. Gold, as the money commodity, has 
no price, but many values. Any commodity indeed, whether 
gold or other, and whether money or not money, must have 
as many different values as it has different actual or potential 
exchange relations. 

By what test is any standard capable of stability or fluctua- 
tion. — Whatever stability is attainable in the relation of 
deferred payments is, therefore, only such stability as may 
attach to the standard, whether money or other, that is 
employed in the case. But how determine whether any actual 
standard is stable ? Price, equally with value, is not adapted 
to the measure function. The money, say gold, returned as 
payment is not a measure of anything ; it is merely the agreed 
form of payment, the selected standard. The difficulty with 
either price or value for the purposes of a measure is that 
each is lacking in the quality essential to measurement. 
The impossibility that value in the market sense be measured, 
or that anything of value can serve as a value measure, lies 
in this very fact that it is the very essential of a measure 
that it possess in itself the quality it is to measure in other 
things. Only something of length can measure length; 
only something of weight can measure weight. And the 
choice of a measure is necessarily arbitrary ; to express any 
dimension of any given body is possible only in terms of 
relativity and only by reporting it as such a part or such a 
multiple of the dimension of some other body. So many 
pounds of weight is merely so many times the weight of 
another chosen body, taken at a certain purity, under pre- 
scribed conditions of temperature and of altitude. 

Measurement is quantitative. — Both market value and 
market price fail in the requirement fundamental to the 
notion of measurement, namely, that a measure must be 
quantitative and must measure things of quantity. Neither 
value nor price is a magnitude or a quantity, but only a 
ratio. True, a ratio can be restated as a fraction — ^ 
or f or I of unity — but it becomes quantitative only in 
becoming concrete, as ^ or f or f of something. Thus, that 
the exchange ratio between hats and shoes is, say, 2 to 1, 



244 THE ECONOMICS OF ENTERPRISE 

offers no possibility of giving quantitative expression to the 
exchange ratio of hats and shoes to each other or to anything 
else. Nor does the selection of a conventional price com- 
modity avoid the difficulty in any other sense than that it 
makes possible of comparison the ratio of horses to gold 
with the ratio of hats to gold — ■ all to the conclusion that, 
while horses stand to dollars as 100 to 1, hats stand to dollars 
as 1 to 1. This expresses merely the two different exchange 
ratios held by the respective commodities to gold — asserts, 
that is, two different powers of command over gold, and 
then declares that one power is one hundred times as great 
as the other. But merely as different ratios to gold no meas- 
ure is disclosed : (1) The value of gold is itself possible of 
expression not as a ratio of exchange to commodities in gen- 
eral — for there is no such exchange possible and no ratio 
for its expression — but only as one or another of countless 
different possible ratios. (2) This same ratio of 100 to 1 
between horses and hats is equally valid to express the rela- 
tive ratios of countless other pairs of commodities to gold, 
e.g., pianos and kitchen tables, houses and sewing machines, 
shoes and laces. The ratios of things to one another in 
Brobdingnag were the same ratios as in Lilliput. The real 
difficulty is again that all these various ratios to gold are 
mere ratios of exchange, and are comparable simply and 
only in this reference, and are entirely lacking in any ulti- 
mate basis or content. In this respect the case differs from 
true measure ratios of weight or length. With weight 
the reference is to the quantitative objective reality of pres- 
sure or stress — with length, to the objective quantitative 
fact of extension. With the value ratio, however, there is 
nothing but the ratio. 

The meaning of stability. — What, then, can be meant by 
a stable standard of deferred payments, it being admitted 
that there is no such thing possible as stability in value f 
The money commodity being itself the standard commodity, 
it can mean nothing to speak of money or of gold as stable in 
price ; and it has been shown to mean even less to speak of it 
as stable in value. In what, then, consists that stability which 
is so desired ? Why is it so desired ? and how does it matter ? 



THE DISCHARGE OF DEBTS 245 

It must again be recalled that the problem is mainly one 
of achieving justice between debtors and creditors. Inas- 
much as all contracts for deferred payment must run in 
terms of a standard, and inasmuch as it is practically neces- 
sary that all of these contracts run in terms of money — 
gold, as the standard — the changing exchange-relations of 
money to the countless other things which it is used to pur- 
chase become of great importance. 

The effect of changes in the values of money. — As an 
intermediate in exchange, money expresses general purchas- 
ing power. But if the receipt of it always followed promptly 
upon the sale or service for which it was received, and if 
the expenditure of it always followed promptly upon the 
receipt, it could evidently not greatly matter what the gen- 
eral price situation might be, or how greatly or abruptly this 
situation might change. Changes come to signify only as they 
occur between the time of the receipt of the money, or of 
the right of receipt, and the time of expenditure, or of pay- 
ment. A money must be a defective money if, getting, it 
to-day, one cannot tell what it will purchase to-morrow ; or 
if, selling goods to-day, one cannot tell with reasonable 
assurance what the money will buy when it shall be paid a 
month later ; or if, loaning money to-day one be uncertain 
what it will buy at the expiration of the term of the loan. 
This would be to make the medium of exchange itself a spec- 
ulative thing. 

But why should it not be speculative ? — If one has bor- 
rowed iin ounce of gold or a pound of gold, may he not justly 
return an equal weight in payment, just as if he had borrowed 
a ton of iron or a barrel of flour? There is risk of change 
in all other commodities ; why should it be an evil that there 
be also risk with the medium of exchange when used as stand- 
ard? Each party to the contract for gold accepts this risk 
of change — a risk against which no agreement to return 
any specific thing in the future can be entirely free. So — 
it may be argued — no one is wronged ; both parties to 
the contract know its risks ; it is a fair agreement, only it 
is in some measure speculative. If one has borrowed a 
pound of gold, let him return a pound. 



246 THE ECONOMICS OF ENTERPRISE 

But the special fitness of the standard commodity for its 
use as standard rests in this very fact that it is a commodity 
relatively and especially free from this menace of change. 
A standard is ideal for its pui^ose in the precise degree that 
it approximates stability. It is defective — no matter how 
much better it may be than some alternative commodity — 
in the precise degree that it falls short of stability. Other- 
wise the money itself would introduce into business new and 
serious elements of speculation. The standard is chosen 
with this very purpose of avoiding to the utmost these spec- 
ulative modifications in contractual relations. Possibly 
enough there will never be found an ideal money — probably 
there will not. And it may well be true that there is less of 
speculation in gold contracts than in other contracts. But 
a perfect money would not be speculative at all. If the 
standard of payments itself fluctuates, this is in itself an 
evil. 

Deferred payment merely a special case of price exchange. — The 

foregoing considerations will gain new force with a further analysis 
of the relation of deferred payment. When you sell for cash, you 
get the right to buy commodities or services. From your point of 
view, the exchange is really complete when j^ou have used your cash 
in making purchases. Likewise — while not so clearly, yet ulti- 
mately as truly — ^all cases of notes and bonds and credits in general 
are really protracted instances of the same sort of exchange. The 
wholesaler sells his groceries at three months' time. Instead of 
receiving his pay immediately in commodities, or in the money with 
which to buy commodities, the payment side of the trade is post- 
poned for three months. It is important, then, that the medium of 
exchange shall be stable in purchasing power, else one party to the 
trade is helped and the other hurt by the mere fact of the delay. 
So when you loan money, you really transfer the right to things or 
services ; when you are repaid, you get in return the right to things 
or services. Thus a loan is, in essence, a long-time barter. If you 
have sold hats and lent the proceeds of the sale to X, it amounts to 
the same thing as selling to X the hats or the goods which the sale 
price of the hats will buy. When he pays you, he really returns to 
you your remuneration for the hats. If, therefore, his payment to 
you be a just one, the money in which he pays must not have gained 
or lost in its control over the means of satisfying wants. An appre- 



THE DISCHARGE OF DEBTS 247 

ciating money is, therefore, an injustice to the debtor — a depreciat- 
ing money equally an injustice to the creditor. It is thus evident 
that it is only the existence of credit relations that makes the stabil- 
ity of the standard seriously important. 

Test of stability is in utility. — But it still remains to seek 
out the test according to which the standard may be declared 
either stable or unstable. If the general trend of prices be 
taken to afford the test, in what consists the ultimate bear- 
ing of prices ? 

An appeal to the function of money in current exchanges will 
again serve to clarify the analysis. The sale of a hat for money, 
precisely because it is a transaction of exchange, reports an ex- 
change ratio — a value relation — between the hat and the money. 
So, the payment of this money for a pair of shoes reports one more 
exchange ratio between money and shoes. Two value relations, two 
ratios of exchange between gold and goods, have been established — all 
to the result of working out one exchange relation, the barter relation, 
between hats and shoes. But suppose the case to be that only one 
exchange has occurred and only one exchange ratio has been estab- 
hshed — the hats having exchanged directly, by barter, for the 
shoes. Here, in the very terms of the problem, is a simple value 
exchange. But note the nature of the terms in this value ratio: 
both are items of goods, useful things, not value items. Exchange 
does not transfer values, but goods. Ratios of exchange, value 
ratios, are ratios between things — things which are not, for the 
purposes of the exchange, either price or value items, but only items 
of goods. The step from hats to shoes is merely a step from one 
useful thing to another; but it is divided into two shorter steps. 
Just as the purpose of the isolated producer is utility, the satisfac- 
tion of his wants, so ultimately the meaning of product to the 
producer for the market is the utility of the things into which he 
will exchange it. Likewise his cost outlay is ultimately a magnitude 
of utility or of disutility rather than a magnitude of value. Value, 
an exchange ratio, really has no magnitude. So, again, from the 
point of view of the consumer, gain in utility is the sole ultimate 
motive of trade. What one pays for a thing more than he would, if 
necessary, have paid, his buyer's or seller's surplus, while it must 
first appear in a money statement, must finally resolve itself into 
goods obtainable through money — into utility, not into price or 
value. Producers at the margin, like traders at the margin, are 
such by the fact that the utility in prospect and the utility sacri- 



248 THE ECONOMICS OF ENTERPRISE 

ficed are at balance, — are at a ratio, one to the other, of equality, — 
and all of this irrespective of how greatly, for the different marginal 
traders respectively, the absolute magnitudes of the balancing serv- 
ices and sacrifices may diverge — irrespective, that is to say, of 
whether the marginal case present a ratio of 5 to 5, or of 2 to 2, 
or of I to J, — provided all the while, of course, that even this 
much of comparability may be assumed between the feeling magni- 
tudes of different men. 

The principle of payment is indemnity. — In view, then, 
of the fact that exchange is ultimately, in individual motive, 
a problem of comparison between alternatives of utility — 
that the quid-pro-quo on either side is, in last analysis, a util- 
ity quantity, that consumption has to do not with value, but 
with utility, that market values are mere exchange relations 
between things of service, and that price relations are mere 
intermediate steps in the ultimate barter of goods — the 
problem of a just and adequate payment to the creditor, or 
of a just and adequate sacrifice to the debtor, resolves itself 
into a problem of indemnity on the one side and of sacri- 
fice on the other, into quantity of utility rather than into 
terms of price or value. A standard is working properly 
for purposes of deferred payments accordingly as it meets 
this test of equality of utility — of indemnity. It must 
return the same total of general purchasing power — of 
command over the general range of commodities in the pro- 
portions in which they commonly enter into consumption. 
And because a general rule of payment can take no account 
of the infinitude of individual differences among men in 
the construction of their budgets of expenditure, this prin- 
ciple of indemnity can apply only impersonally and in a 
large and general way to all contracts of deferred pajonents. 

The ultimate test. — The general system of prices, there- 
fore, is indeed the test, or, more accurately, presents the 
facts by the use of which the test of utility can be applied. 
If the price system itself afforded directly the ultimate test, 
all commodities — pepper, flour, meat, coal, quinine — 
would be equally important in the case, pound for pound, 
yard for yard, or bushel for bushel. Inasmuch, however, 
as utility is the test, each commodity must be taken in the 



THE DISCHARGE OF DEBTS 249 

due proportion presented by the relative consumption of 
it in terms of price. Thus, we arrive at the acceptance of 
the multiple standard of deferred payments as the ideal 
standard — a standard based, not upon any one commodity, 
and not equally upon all commodities entering into general 
consumption, but upon all commodities taken in proportion 
to their importance in the average individual budget of ex- 
penditure. The dollars returned in discharge of a money 
obligation should be a sum of dollars equivalent to the prin- 
cipal sum in respect to power over the general schedule of 
commodities — "a, method not intended to avoid the use of 
money as a means of payment, but to compute for purposes 
of justice the amount which, returned, would constitute fair 
payment. It may be doubted whether the method will 
ever come into general use or would prove entirely practi- 
cable if adopted; but the principle on which it proceeds 
has been accepted by most economists as indicating an 
approximately ideal standard." ^ 

Utility test relates solely to consumption goods. — A detailed 
treatment of certain aspects of the problem of deferred pajrments 
must be postponed to other pages. There is neither space nor 
need here for inquiring whether the test of utility points to equality 
in marginal utility or in total utility, or for investigating the bearing 
of changes in the standard of living upon the ideally just payment. 
It must suffice for the present to have established the test as one of 
utiUty. One other difficulty remains, however, for present discus- 
sion. The argument thus far has implied that equality of payment 
has reference solely to consumption goods, and that upon the basis 
of these exclusively is the tabular — or multiple — standard to be 
constructed. If, however, this is the correct view, it is not quite ob- 
viously or axiomatically so. Surely the purchasing power which was 
loaned was the command of farms and of machinery and of long- 
time consumption goods, like houses, and furniture, as well as the 
command of commodities of immediate service. Equally clear is it 
that men desire income-earning properties as well as present goods. 
When the interest rate falls by one half, this means that the man 
who desires to provide for his own old age, or to provide a given in- 
come for those dependent upon him, must save twice as large a 
principal fund. So, if one decides to buy a farm of a given net an- 

1 Davenport, Outlines of Economic Theory, Macmillan, 1906, 
See. 163. 



250 THE ECONOMICS OF ENTERPRISE 

nual rental, this will require from him twice as large a purchase 
price. If, then, the only use of purchasing power were in the 
acquirement of investment properties, a fall in the rate of interest 
might seem to demand, as the payment of a loan, a corresponding 
increase in the number of dollars to be returned. If consumption 
goods are faUing in price and investment properties are rising, both 
classes of goods have seemed to some economists to require considera- 
tion in constructing a multiple or tabular standard. Both classes 
of goods absorb purchasing power; shall not the return of equal 
purchasing power be computed in view of both classes of goods? 

But it is to be said, on the other hand, that all capital investments 
and all capitalization — present worth — of long-time consumption 
goods, or of ground rents, or of annuities, are merely rights to future 
consumption reduced to a total of present worth. All represent 
postponed consumption which is ultimately to mature into a some- 
time present consumption. Is there any force or purpose in a 
standard which shall impose as payment upon a loan the return of 
rights to future consumption goods — future incomes — instead of 
rights to immediate incomes? 

Professor Irving Fisher and Harry G. Brown have cogently 
argued that investment properties must be included in the tabular 
standard : "To base our index numbers for time contracts solely on 
services and immediate consumable goods would, therefore, be illog- 
ical. Though the practical difficulties may amount to little, yet, 
in theory at least, they are important." ^ 

But are they important even theoretically? In view of the 
fact that the future incomes commanded by the investment prop- 
erties are merely postponed consumables in place of immediate 
consumables — mere abstinences from present consumption, — 
and in view of the further fact that an investment made at market 
prices is merely a future consumption chosen as substitute for pres- 
ent consumption, and that these future goods are, at the purchase 
prices of the properties controlling them, merely the market equiva- 
lent of the present consumables that they displace — does it at all 
matter whether they are or are not included? To pay in present 
consumables is to pay in something that will, if it is so desired, buy 
these future consumables, and will buy them upon an exchange 
basis precisely representative of their relative importance at the 
time of payment. This is the rate of exchange which the market 
fixes for present goods against future goods. 

1 See Irving Fisher, Purchasing Power of Money, Macmillan, 
1911, pp. 213-217; and Harry G. Brown, Quarterly Journal of 
Economics, August, 1909. 



THE DISCHARGE OF DEBTS 251 

Consider Fisher's argument : " If the rate of interest should fall, 
the borrowers will be benefited [having to turn over less of farms, 
or machinery, or annuities, or ground rents] and the lenders injured. 
The value of land and of any other property would rise in comparison 
with the value of food and shelter, and so on." But this payment 
in food, shelter, and so on, when exchanged over into land, houses, 
etc., will buy less of these, precisely because the land and houses 
representing future food and shelter are now worth less in terms 
of present food and shelter. Abstinence has become easy and is, 
therefore, cheap. Justice to the creditor does not require that he 
shall be paid in future food and shelter on the basis of the earher 
and more difficult abstinence. It has become easier to make 
provision by saving for future food and shelter. When the saving 
has become easier, he should not have the earlier and more 
generous reward for it. 

The purpose of this chapter has been not primarily to ex- 
amine or solve a problem in the theory of money, but rather to 
lay the foundations for a discussion of the theory of interest — 
to show that the contract in which interest manifests itself 
is a contract of deferred payments, and is commonly and typi- 
cally, and almost necessarily, a contract for the payment of 
future money; and that therefore the interest problem has 
to do with the charge or premium or rent which accrues with 
time upon an obligation for the payment of money ; that in- 
terest, as the equating point of demand with supply, is the 
agreed differential between present money and future 
money ; that there is, in the nature of the case, nothing else 
that it can practicably be ; that to conceive of interest as a 
premium of present value over future value, or of the interest 
problem as a value problem of any sort, not merely dissociates 
the problem from the actual facts of business, misrepresents 
it, makes it difficult or even insoluble, but also, in the last 
analysis, makes nonsense of it ; that to state the problem as 
one of price is merely to repeat the evident and patent fact ; 
that to associate the interest problem with the problem of 
deferred payments does little more for the interest problem 
than to help toward getting it accurately stated ; that the 
problems are fundamentally distinct — deferred payments an 
examination of what ought to be as matter of justice — in- 
terest an analysis of the causes and the processes of what is ; 
but that the two problems are alike in this — that neither has 
anything to do with value, or with any aspect of value, but 



252 THE ECONOMICS OF ENTERPRISE 

only with money and the relations between present money and 
future money. 

Interest, then, can, in its very nature, manifest itself only 
in the relation of deferred payment. It has its basis in the 
postponed discharge of the very obligation that the deferred 
payment discharges ; it is a surplus above the sum returned as 
deferred payment, and is a surplus paid precisely because the 
payment is deferred ; it is a contract to pay money for money, 
and the rate is a per cent per dollar per period. 

Thus, while rent pays for a given thing which is later to be 
returned in the form of the specific thing that was lent, and 
is merely the hire of that thing without reference to the ratio 
between the price of the thing and the return upon it, — the 
interest relation does not involve the return of the specific 
money lent, and does involve the reduction of the hire to the 
dollar-time unit. With this modification, interest is rightly 
to be defined as the rent of money. 

The next chapter will, however, investigate not the interest 
problem, but the various problems connected with the theory 
of moneij and credit — postponing to the following chapter the 
discussion of loan capital and its relation to interest. Since 
money is both the thing loaned and the thing repaid, the 
right working of a standard of deferred payments, and the 
significance of the loan and interest contract, must depend 
upon the existing exchange relations between money and 
goods, the changes to which the relations are subject, and 
the influences by which these relations are determined and 
modified. Thus a general discussion of money logically suc- 
ceeds the analysis of the standard problem and precedes the 
detailed study of the problem of interest. The next chapter 
will, therefore, examine : (1) the ultimate and the deriva- 
tive fimctions or aspects of money and currency, leading 
(a) to the definition of money and of currency, and (6) to 
the qualities essential in the money commodity or commodi- 
ties ; (2) the fixation of the exchange relations between 
currency and the various goods between which it serves as 
intermediate, leading to a discussion of (a) banking and the 
effects of banking credit and of other credit upon the ex- 
change values of gold as medium and of its substitutes, (6) the 
nature of crises and their relation to the exchange ratios of 
the intermediates in trade — prices, (c) depressions and their 
relation to prices, {d) Gresham's Law, leading to the effects 



THE DISCHARGE OF DEBTS 253 

of currency inflation, whether by birnetaUism, paper money, 
or extended credit, (e) the Quantity Theory of money, (/) bi- 
metalhsm in general. 

This discussion of money will especially emphasize the rela- 
tions of banking and credit to the volume of circulating 
medium, and thereby to the volume of the loan fund at any 
given time — as preparatory to the study of the rates of hire 
paid for the time use of funds — interest. 



CHAPTER XVII 

MONEY, CREDIT, AND BANKING 

Some intermediate conclusions. — It has already been made clear 
that division of labor is possible in a competitive society only in the 
degree that exchanging takes place ; that exchanging can take place 
on practicable terms only with the use of a medium of exchange ; 
that stability in the medium of exchange is seriously important only 
in relations of deferred payment ; that relations of deferred payment 
require the use of a standard ; that it is practically unavoidable that 
this standard be money ; that the stability of money for the purpose 
in hand has reference only to stabiUty in the command of things of 
serviceabihty ; and that contracts for deferred payments and con- 
tracts for the payment of interest have both to do with deferred 
payments in money. 

Some deductions. — It must follow that whether the standard is 
stable or is fluctuating, and the degree of the fluctuation, depends 
upon the degree in which there is a general or average change in 
prices. To say that the price of any commodity is faUing is to say 
that a given quantity of the standard, money, will buy more of that 
commodity. If money is to remain constant in its control over 
goods in general, there must be no important change in prices in the 
large. The degree of this change is the measure of the instability of 
the medium. It thus comes about that both for the problem of 
interest and for the problem of deferred payments we are concerned 
to investigate the influences that bear to establish the price situation 
in general, and especially the influences that are effective to modify 
any system of prices which is once established. 

Currency is that thing, or those things, specialized to the 
intermediate function in exchange and generally accepted 
in that function. Whatever thing has come, legally or 
conventionally, to be accepted as a medium of exchange is 
a currency thing. But it is currency only when so used. 
When used as ornament or as a raw material in industry, 
gold is not money, currency. When, for example, beads 

254 



MONEY, CREDIT, AND BANKING 255 

and ribbons are carried by traders to mid-Africa, these are 
intermediates to the traders, though generally mere con- 
sumption goods to the natives. The goods received by the 
traders are some of them wanted by the traders as consump- 
tion goods ; some of them are carried home for sale. The 
latter are currency for the purposes of the particular case. 
The function of money is essentially and fundamentally 
the intermediate function. 

The different uses are subdivisions of the intermediate 
function. — In last analysis, also, all the different uses of 
money or currency are merely different aspects or emphases 
of the intermediate function. Deferred pajrments, as we 
have seen, are merely deferred payments of the intermediate. 
So, again, of the standard aspect ; whatever is the general 
intermediate is by that fact the standard. The functions 
are not two, but one — began together, and have grown to- 
gether. That two things exchange one against the other 
imports and implies — or rather is — an exchange equality 
of each to the other. No more than this can the facts ever 
report — mere ratios of exchange. Different things can, 
however, be compared as to their respective exchange ratios 
to some third thing. When practically all exchanges are 
made through an intermediate, all exchange ratios come to 
be compared in terms of their exchange relations to that in- 
termediate. Essentially it becomes a commodity of refer- 
ence. Exchanges excepting through the intermediate rarely 
occur ; and values, as exchange ratios, are actual things. 
So, to declare the value ratio of cloth to wheat, copper to 
tea, meat to cotton, is merely to deduce from the actual 
price relations what these non-monetary exchange relations 
would be if only they actually were ; or it is a computation 
declaring the different and ultimate barter relations which 
the use of the intermediate permits. 

Doubtless wheat or cattle or cloth might be used as the 
unit of reference or computation and in this sense be a stand- 
ard, even though never employed as intermediate. But of 
how many yards of cloth is any given good the equivalent? 
If neither actually exchanges against the other, it will be 
necessary to find something against which, directly or in- 



256 THE ECONOMICS OF ENTERPRISE 

directly, they do exchange. Any standard which does not 
report actual exchanges reports mere deductions made from 
actual exchanges ; there is somewhere an actual standard or 
standards on which as mere deduction the particular standard 
rests. 

Clearly, also, the intermediate may be a storehouse of 
purchasing power. The second half of the barter may be 
deferred. The intermediate is generalized purchasing power. 
Delay is one of the privileges which especially the interme- 
diate function carries with it. 

So by its very nature the intermediate serves as payment 
in whatever transaction it is used. This function of pay- 
ment — liberation, discharge, acquittance — may be a matter 
either of custom or agreement or of legal enactment. But in 
any case it is one of the functions of intermediateship, pre- 
cisely as in every case of deferred payment. 

Money defined. — It must be noted, however, that the interme- 
diate function is ordinarily served not solely by minted gold, by gold 
certificates (government receipts for gold coin deposited), by silver 
coin and silver certificates, by government notes payable on demand 
in coin (greenbacks), by banlc notes payable by the issuing bank on 
demand in legal tender, viz. in gold, gold certificates, silver, silver 
certificates, and greenbacks — but also by checks, drafts, and orders. 
All these different media the economists term currency; but not 
all are either technically or popularly called money. All moneys 
are intermediates, but not all intermediates are money. In truth, 
pretty much anything may, on occasion, function as intermediate 
for any clever trader; and in a barter economy there would be, 
as we have already seen, not one medium of exchange, but an in- 
definite number of media. What, then, precisely, is money? 

Clearly redeemability is not the test ; nor is the money in which, 
by custom or by legal requirement, all the others are finally to be 
redeemed, the sole and only money ; though it must be recognized 
that, so long as this redemption is maintained, the ultimate money is 
the ultimate standard, the exchange values of it being really reflected 
and represented by the others. But greenbacks were money in the 
United States before specie resumption became actual in 1879. 

Nor is the promise of a some-time redemption necessary to the 
money function; the ultimate money might itself be government 
paper issues without either prospect or promise of redemption other 



MONEY, CREDIT, AND BANKING 257 

than that required by the legal tender privilege or the tax-paying 
power. On some terms, clearly, the legal tender function will cir- 
culate a purely fiat money — a money unsupported by any promise 
and resting on no valuable material basis. If one will pay a lawyer's 
fee to be defended against a claim, or the costs of an insolvency suit 
for a discharge from legal obligations, surely one will give something 
for paper issues controlling this power of legal acquittance. Poor 
money they may easily be, but money of some sort they certainly 
are. In a sense, doubtless, all money is credit ; the receipt of it as 
intermediate implies the faith that the receiver can pass it along, 
that others will take it, that it will retain its value standing till he 
is ready to offer it anew as purchasing power. He accepts it as a 
demand against the market. Saving and hoarding, indeed, espe- 
cially emphasize this credit aspect of the intermediate. 

Power of acquittance is the test. — It is the aspect of the intermedi- 
ate commodity as payment, as means of acquittance, of contractual 
execution, of redemption — whether established by legislative gift 
of legal tender power, or by social custom and convention — to 
which we shall best appeal in our analysis of the different popular 
and technical variants of the concept of money. These different 
meanings refer to the differing degrees in which the different media 
possess this potency of payment — to the breadth of the field over 
which (a) legally, (6) actually, this function of acquittance, of execu- 
tion, is performed. Put in another way, the money of highest 
grade is that money which has least intermixture of legal or 
contractual credit — that money which does not rely for its 
current acceptability upon any claim that it carries with it of pay- 
ment in some other sort of money. 

" Real "money, then, standard money, the money of ultimate re- 
demption, is that money — gold coin, for example — which has the 
power of fulfillment and discharge of any and every credit obligation. 
Even a contract for the delivery of houses or lands, or for perform- 
ance of personal service, if not specifically performed according to its 
terms, transforms itseff through court procedure into an obligation 
to pay money. In strict common law theory, it may indeed be 
said that one has the right to do anything, subject to the necessity 
of paying legal tender for it. That, then, is conventionally money 
for all purposes which is conventionally able to serve as payment for 
all purposes — to redeem anything. That is legally money for all 
purposes which has a parallel legal efficiency — gold coin, for exam- 
ple. Irredeemable paper money, also, is legally this, and, as many 
economists believe, would be also conventionally this. Interpreted, 
then, from the point of view of this principle, moneys range from the 



258 THE ECONOMICS OF ENTERPRISE 

partial to the complete money function, according to the degree of 
their efficiency as payment. In what range or relations do they 
(a) legally, (6) actually, serve ? What obligations do they discharge ? 
Which redeems the other? And which all the others? That 
medium which both legally and conventionally is weakest in power 
of payment — private credit and checks against bank balances — is 
commonly called not money but mere currency. Bank notes, as 
more objective and impersonal in standing, are stronger in paying 
power than ordinary credit ; but they are still weak in the sense 
that legally and, upon occasion, actually, they are subject to re- 
demption in moneys of higher rank of paying power. Silver 
certificates and gold certificates are one grade lower in rank 
than the coin in which they are respectively redeemed ; the re- 
lation of warehousing is fundamentally a credit relation. Sil- 
ver coin and greenbacks are ultimately redeemable in gold coin. 
Gold bullion is conventionally, in many relations, money of the high- 
est rank. Gold coin is both conventionally and legally of this 
grade — -a medium of acquittance for all purposes.^ 

Money is a relative term. — It appears, then, that whether a 
given medium is money for the purposes of any particular discussion 
must depend upon its relation in the case to some other form of 
medium. Relatively to any medium or to any obligation, that is 
money which carries the power of payment or of redemption. 
Credit, the lowest order of medium within the currency classifica- 
tion — currency meaning unspecialized, suspended purchasing 
power — is the medium of the weakest, or of vanishing, efficiency 
in redemption. It is, then, mostly an arbitrary matter whether 
credit be called money for any purpose. Popular usage has not 
applied the term to it, and technical usage has presumably done well 
to follow. 

One currency may occasion demand for other. — But note again 
that it is in the very nature of ultimate money, money of the highest 
rank, that all of the lower grades and forms of circulating media are 
redeemable in it, and hold a parity of exchange power with it, so far 
as actual redeemability is maintained. In some degree, therefore, 
and upon occasion, these lower forms of media furnish a demand for 

1 Walker's and Fisher's definitions of money both imply these 
differences of degree : 

" Any commodity generally acceptable in exchange." — Fisher, 
Purchasing Power of Money, p. 2. 

" Money is the medium of exchange. Whatever performs this 
function, does this work, is money." — Walker, Advanced Course, 
Sec. 162. 



MONEY, CREDIT, AND BANKING 259 

the ultimate money and to this extent rank lower than it in ex- 
change efficiency. 

The important qualities. — The money commodity, or the 
different commodities used as money, must have great purchasing 
power in small bulk, and yet not so great a power as to be over- 
minute for small transactions. The necessary adaptation of bulk 
to the magnitude of the transaction is commonly achieved through 
the use of different commodities side by side as money — gold, silver, 
nickel, copper, paper. Division and combination of the ultimate 
money must be possible without loss. All specimens of it must have 
the same quality, must be durable, must not seriously deteriorate 
or improve with time, whether by decay, chemical change, growth, 
or reproduction. The total currency must be so far stable in supply, 
relatively to the demand for it as an intermediate, as not greatly to 
fluctuate in its exchange relations with other commodities. Iron 
would be too bulky, varies greatly in quality, and is subject to rust. 
Hay is too bulky and is variable in quality and quantity. So with 
wheat and tobacco. Diamonds are over scarce, variable in quality, 
and cannot be divided or combined without great loss. 

Rate of current increase. — Whether the standard money com- 
modity is likely to be the more or the less stable by having other 
than money uses is not quite obvious. But it is clearly important 
that the annual product of the standard commodity be so small in 
proportion to the existing supply that rapid fluctuations are im- 
possible from the supply side of the case. Wheat or tobacco is 
mostly consumed in the year of its production, and therefore varies 
in supply with the year and the time of the year. So also with coal, 
and measurably so with iron. But gold is rarely consumed in the 
sense of being- destroyed and is commonly not so intermixed with 
other products or with labor as to put it out of practicable reach for 
money purposes. In some cases, doubtless, e.gr.,with gold filagree 
work, much of the value is due to the manufacturing expense ; but 
still most of the supply of gold from all the past years is the supply 
of any present year or day. Gold is, therefore, relatively stable 
on the supply side. An amount of water which poured into a 
washtub will seriously change the level will not greatly affect the 
shore line of a lake. 

Credit, Currency, and Banking. 

The intermediate employed in actual transactions is, in 
increasing degree, that form of currency called credit, the 
lowest order of currency, rather than money itself. Checks 



260 THE ECONOMICS OF ENTERPRISE 

and drafts make up a progressively larger share of the circu- 
lating medium. The net deposit credits in the national banks 
in the United States — to say nothing of the other banks — 
are double the volume of the actual money in the country. 
And a large share of this actual money is really employed as 
reserves to support the credit circulation. More than 90 per 
cent of the larger sorts of transactions are mediated through 
the use of deposit credit, and probably more than one half 
of the remaining transactions are similarly effected. Thus 
the study of banking is essential to any understanding of 
monetary problems. 

The method and extent of credit issue. — Assume that a 
bank with a cash capital of $100,000 is opening for business 
in an isolated town and is the only bank in that town. How 
much can it lend ? Ordinarily a bank lends by discounting a 
customer's note and by giving the customer a deposit credit 
upon its books for the proceeds of the note. The transaction 
amounts to the exchange of the banker's promise to pay on 
demand against the customer's promise to pay at the end of a 
specific short term — say from one to six months. Accord- 
ing to the United States law a rural bank needs keep on hand 
only 15 per cent of its deposit liabilities. If, now, our bank in 
question lends S100,000, giving deposit credit for this sum, 
it has $100,000 of cash on hand against $100,000 of cash lia- 
bility. Its statement will stand as follows : 

Resources Liabilities 

Cash $100,000 Capital Stock $100,000 

Notes 100,000 Deposits 100,000 

$200,000 $200,000 

Now let it lend another $100,000. With its loans and de- 
posits each standing at $200,000 its reserves are 50 per cent 
of its demand liability. Only with $666,666 of loans will its 
reserves have reached the 15 per cent limit : 

Resources Liabilities 

Cash $100,000 Capital Stock $100,000 

Notes (Loans and Dis- Deposits 666,666 

counts) 666,666 $766,666 

$766,666 



MONEY, CREDIT, AND BANKING 261 

Further : Suppose that $100,000 of cash is deposited with 
the bank from the channels of business ; how much more can 
it lend ? $15,000 must be retained as reserve against the new 
liability; $85,000 is available as reserves against further 
lending. Based upon these further reserves loans may be 
granted to the extent of nearly $600,000 more. In fact, 
only with an expansion of $1,233,333 in loans and in derived 
deposits — a total deposit of $1,333,333 — has its reserve 
fallen to the ratio of 15 per cent of its liability. 

Resources Liabilities 

Cash (original) $100,000 Capital Stock $100,000 

Loans & Discounts 666,666 Deposits 666,666 

^ , , , [ 85,000 T, •. / N 1 100,000 

Cash (new) j ;^5 qoo Deposits (new) | r^QQ^QQQ 

L & D (new) 566,666 $l,433i333 

$1,433,333 

The situation summarizes as follows : On its asset side 
the bank has $200,000 of cash and $1,233,333 of securities 
(Bills and Notes). Its deposit liabilities amount to $1,333,333. 
2 

Its cash is of its liability — 15 per cent. 

13.3 + 

The function of reserves. — If this is what actual banking 
means, is banking sale? What would happen if all these 
deposits were immediately called for in cash ? True, not all 
are likely to be called for, but some cash will be demanded. 
In fact, the borrowers, instead of accepting all of the proceeds 
of these notes in deposit credit, will in some measure require 
and receive cash. Precisely so ; and so the bank must keep 
on hand a cash reserve to meet this possibility. For the most 
part, however, the customers of the bank make payments 
through checks upon the bank, and these credits are deposited 
in turn to the credit of other customers. No cash, but only 
bookkeeping, is required. And if some customers draw out 
cash, other customers will probably receive it and return it to 
the bank. A reserve of 15 per cent is enough for the case. 
There would, indeed, be small gain in banking if against every 
deposit an equal sum in cash must be held in store by the 
bank. 



262 THE ECONOMICS OF ENTERPRISE 

Economy of redemption money. — It is thus evident that 
the employment of $200,000 cash as a banking reserve has 
made possible the existence of a more than sixfold volume of 
circulating medium — currency. Against each $1000 of 
deposit liability there need be only $150 of actual cash. The 
bank customer, however, thinks of his deposit claim as money, 
and it really serves him all the purposes of money. The 
right to have the money when desired is as good as the actual 
money, is more convenient, and is as readily and as service- 
ably transferred. 

The economy of money through the use of credit substi- 
tutes for money extends really further than the foregoing 
analysis indicates. Under the law, three fifths of the reserves 
of a rural bank may be on deposit with banks in reserve cities. 
Thus against $100,000 of deposit liability the rural bank 
needs hold only $6000 of reserve money. Against the de- 
posit of the remaining $9000, the reserve bank is required in 
turn to hold a reserve of only 25 per cent — $2250. And of 
this required $2250, one half may be represented by deposits 
in central reserve cities, e.g., New York, Chicago, and St. 
Louis. Against the $1125 deposited with it the central re- 
serve bank is required to hold only 25 per cent of reserves — 
$281.25. Thus at the outside limit of credit extension, 
$100,000 of deposit currency may be supported by only 

$7406.25 of reserves in money ^6000 + l^^^J + ^11^^ 

one dollar of reserves upholding $13 of currency. 

It is, of course, not true that the banks ordinarily allow their 
reserves to run as low as the legal limit, or make the utmost possible 
use of the privilege of counting claims against one another as legal 
reserves. Nor is it accurately true that all forms of money are of 
equal efficiency in the support of credit. Not all forms of money, 
but only those of the higher levels in the money scale, are allowed 
to be counted as legal reserves. We have already noted that some 
forms of money make demands upon other forms for redemption, 
or are hmited in exchange power to the exchange power of the forms 
in which redemption is to be made. Tlie total excliange efficiency 
of the money of a country is, then, not accurately to be computed on 
the assumption that all moneys are equally efficient for all purposes 



MONEY, CREDIT, AND BANKING 263 

— that some are not in varying degree burdens upon the money 
functions of the others. 

Banking viewed in detail and in the aggregate. — And one further 
modification is called for. The analysis so far made, while vahd 
for any isolated bank, or for the banking system regarded as an 
aggregate, is not precisely accurate for the affairs of any one com- 
peting bank among other banks. When the check drawn by the 
borrowing depositor may be deposited in other banks and collected 
by them against the lending bank, its granting of credits rapidly 
draws down its reserves to swell the reserves of its competitors. 
$100,000 of new reserves may not mean to it an increase of lending 
power of more than, say, $125,000. For banks in the aggregate, 
however, this increase of reserves brings its full several-fold in- 
crease of lending power, provided that all the reserve efficiency is 
utilized in whatever bank it rests. As the lending by each bank is 
depleting its reserves, the lending which other banks are doing is 
reenforcing these reserves. The aggregate possible extension of 
credit is not changed. 

What banks actually do and lend. — It follows from the 
foregoing analysis that, in the main, banks do not lend their 
deposits, but rather, by their own extensions of credit, create 
the deposits ; that these deposits are funds which the de- 
posit-creditors of the bank can lend if they will, and that 
many men into whose hands these deposits fall through 
transfer are certain to use them as funds to be lent. In 
fact, also, even when the deposits in the bank are not derived 
from the lending activity of the bank, but are really funds 
deposited from outside sources, these funds are commonly 
used by the bank as a reserve basis on which loans are ex- 
tended rather than as funds which are themselves loaned out 
by the bank. Banks are, in truth, mostly intermediaries 
between debtors and creditors — but not in the sense of 
borrowing funds from one class of customers in order to lend 
them to another class, but rather in the sense of creating for 
their borrowing customers funds which may be used by these 
borrowers as present purchasing power. The borrower be- 
comes indebted to the bank in order that for his own purposes 
he may use the promise of the bank as the equivalent of 
cash to himself. In the form of a deposit liability the bank 
becomes a debtor to whomever the borrower shall nominate. 



264 THE ECONOMICS OF ENTERPRISE 

The fact that the borrower pays interest while the bank under- 
takes a noninterest-bearing obligation, or pays relatively low 
interest, explains in the main the gains attending the busi- 
ness of commercial banking. 

Deposits and solvency. — It is, therefore, a sheer blunder to 
infer that a bank is rich or strong because of its great total of de- 
posits, or to regard deposits in banking institutions as making part of 
the aggregate wealth of the community. Instead, the deposits 
indicate for a bank the extent of its operations, and indicate for a 
community the extent to which the banks, under the guise of non- 
interest-bearing obligations, have assumed the debts of business 
men, on terms of these business men becoming debtors — • and interest- 
paying debtors — to the banks. The solvency of the bank is in 
its portfoho of securities. Its deposits are not its assets, but 
its liabilities. These liabilities it has mostly created for the 
use of its borrowers. The further it may safely go in assuming 
liabilities, the larger its holdings of borrowers' notes may be, and 
the more interest or discount charges it may collect. Essentially, 
therefore, the business of a bank is a form of suretyship — the 
guaranteeing of its borrowers' solvency — an underwriting of 
the credit of its customers. The bank transfers its customers' 
prospective future paying power into present funds. It is for 
this reason that the contract takes the form of a money loan and 
the premium the guise of an interest payment. 

Bank loans related to currency and loan funds. — And 

note now that it is precisely because the business of a bank is 
to furnish to its borrower a present purchasing power for his 
own use that the business of banking becomes the source of 
the larger part of the circulating medium of society. In 
their service to their customers the banks create currency ; 
and in creating currency they create loan funds which, in the 
hands of the holders of them, are available like other cur- 
rency for any purpose, either lending or other. 

The sources of currency supply. — It is, then, clear that 
the larger part of the circulating medium of society is not 
money; that not all of the money that there is is bullion 
money ; and that not even all of the bullion money need be 
ultimate money — redemption money of the highest rank. 
The sources of currency in society are various — some of it 



MONEY, CREDIT, AND BANKING 265 

bullion, with a cost of production limit upon its supply, some 
of it government paper, substantially free of cost, some of it 
banking credit with certain peculiar and appropriate costs 
attending its issue. 

' Currency and its cost of production. — It is obvious that 
the actual limitations upon the supply of exchange media 
must be made clear if we are to understand the influences 
which are fundamental to the exchange values of the currency 
unit. Only, indeed, by this investigation of the sources of the 
supply, and of the terms on which each different factor of the 
supply is available, are we in position to understand the in- 
fluences which impose upon bidders for money a certain level 
of sacrifice in obtaining it. 

What, then, are the limitations upon the supply of credit 
currency supplied by the banks? In other words, what are 
the banking costs in the granting of demand deposit rights to 
customers? Evidently limitations there must be, and 
limitations in the nature of costs, else the competitive activity 
of the banks would indefinitely increase the supply of cur- 
rency, and any would-be purchaser of goods or payor of debts 
or projector of an enterprise could have the time use of pur- 
chasing power gratis ; no limit would exist to the rise in 
prices which must attend this increase in the circulating 
medium. 

What are these limitations? (1) Each bank must con- 
form the volume of its lending, and therewith its issue of 
circulating credit, to the fundamental requirement that it be 
always able to make good its agreement to discharge its de- 
posit liabilities on demand. To maintain reserves involves 
expense. Especially may it be expensive if they have been 
allowed to get low; securities may have to be marketed 
at a sacrifice, or good customers pressed for payment at in- 
convenient times. In periods of general pressure or panic, 
other banks are not likely to be in a position to lend their 
own reserve funds or to consent to create deposit credit in aid 
of still other suffering banks. Not rarely the bank of England, 
in the attempt to attract reserve funds, advances bank notes 
or deposit credit to importers of gold, without imposing the 



266 THE ECONOMICS OF ENTERPRISE 

customary interest charge for the covering of the delays of 
the mint. In at least one case, in 1890, it borrowed reserves 
from the Bank of France. In 1907 the United States Treas- 
ury made especially large money deposits with the national 
banks of New York to help eke out the needed reserves. 
Meantime the interior banks were compelled to pay to ex- 
porting merchants generous premiums for exchange bills upon 
Europe, through which, despite the high interest rates ruling 
in European markets, these banks were able to import 107 
millions of gold for their own reserve requirements. In 
fact, the banking business involves the hazard not merely that 
some of the debtors of the bank may become insolvent, but 
also the general and overhead hazard attaching to its under- 
writing service that it may itself in time of stress become 
unable to meet its obligations. Its liabilities must not be 
allowed to get seriously out of ratio to its cash resources. 

The protection of reserves. — In point of fact also the 
efforts of the various different banks to maintain each its own 
reserve place a limit on the extent to which any one bank can 
extend its activity in the expansion of loans and of the deriva- 
tive liabilities. Just as a relatively liberal granting of credit 
by one bank must tend to transfer its reserves to other banks, 
so a relatively great extension of credit in one center or in one 
country must tend to transfer the reserves, e.g., gold, to other 
centers or countries. Even were it true that a local credit 
expansion has no effect upon local prices and thereby upon 
the currents of trade, some transfers of reserves would still 
take place, and would impose a policy of restriction in credit 
accommodations. But we shall later see that the influence 
is actually exerted by both methods. 

(2) Another cost in bank-made currency. — The loan 
rates of the bank must also provide a fund to cover its costs of 
administration — salaries, clerk hire, rents, and the like. 
Where transactions run in large units the ratio of expense to 
the volume of business may be low. This is in part the ex- 
planation for the low rates of discount in the great financial 
centers compared with the rates outside. Credit currency 
has its cost of production rate as truly as any other service 
upon the market. 



MONEY, CREDIT, AND BANKING 267 

The Demand for Exchange Media. 

Each man's need for currency expresses, on the one hand, 
the advantage which he finds in exchange and, on the other 
hand, the almost prohibitive difficulties of barter. Every 
transaction of barter promises to each of the traders a net 
advantage — a differential between the utility of the thing 
parted with and of the thing received. The use of an inter- 
mediate of exchange divides the barter transaction into two 
steps, two separate transactions. Grain for money and money 
for shoes sum up finally into grain for shoes. The advantages 
of the completed barter 'are achieved through two trades. 

Traders' surpluses in price exchanges. — It is, then, 
evident that the total advantage attendant upon the com- 
pleted barter divides itself into two separate advantages at- 
tending upon the two trades that are involved in the use of an 
intermediate. Every seller of wheat for money achieves a 
seller's surplus ; he would, if necessary, have sold for less. 
When he finally decides to invest his money in shoes, he 
achieves in turn a buyer's surplus ; he would, if necessary, have 
paid a higher price. It is doubtless true that money, as 
money, has no other utility than that of an intermediate. 
But this utility as intermediate it clearly has. Through it 
and dependent upon it accrue all the advantages which at- 
tend the completed barter. 

The allocation of surpluses. — But how shall this advan- 
tage be apportioned between the two steps by which it is 
attained ? Each step is necessary. Does it therefore follow 
that the advantage divides equally? The reservation price, 
the minimum selling price of the seller, say of a cow, is that 
amount of money which expended, say for a wagon, will 
command a utility equal to that of the cow. So viewed it 
would appear that whatever extra money is realized upon the 
sale of the cow is a surplus attached to this sale. But this 
leaves no surplus to be ascribed to the further transaction of 
buying the wagon. Yet the purchase of the wagon is not 
necessarily conditioned on selling the cow. What is the 
minimum price at which the wagon would be purchased? 
Money being good merely for the purchasing of things, the 



268 THE ECONOMICS OF ENTERPRISE 

sacrifice in buying the wagon — once the money is in hand — 
is clearly the foregoing of some alternative commodity that 
the money would buy. The process of expending the money 
offers therefore its separate aspect of gain, equally with the 
process of trading for it. 

Interrelation of surpluses. — The difficulty can be resolved only 
by an accurate appreciation of the nature of trading surpluses in 
general. In point of fact any one of several processes necessary to 
the achieving of an end may exhaust all of the advantages which 
attach to that end. One who is planning to expend $5000 in a house 
would pay, say, twice as much for any essential item in the struc- 
ture as he actually has to pay. But it does not follow that in the 
completed house there is a surplus of $5000 above what he has to 
pay for it in the aggregate. Each of these separate maximum pay- 
ments is conditioned on the fact that the other maximum payments 
are not actually required. Not all of these maxima are possible 
at once. So, again, if there is a $1000 advantage in prospect out of 
the making of a particular journey, one miglit, if necessary, pay not 
far from $1000 to overcome any one special impediment to it — to 
be taken on time to the station, or to be granted an exceptionally 
speedy transport, or to be allowed to stop at a station not upon the 
train schedule. But not all of these maxima could apply at once. 
So what one will at the outside pay for food or shelter or clothing is a 
maximum which is valid solely by virtue of the fact that other 
things can be had at prices far below the maxmium which each 
taken separately might command. 

The truth is that the seller's surplus in the marketing of the cow 
can be taken to be the entire differential between the cow and the 
wagon only upon the assumption that no differential is computed to 
attach to the buying of the wagon. The aggregate of advantage 
is easily arrived at for the two trades. But since both are essential 
to the advantage, it may be equally well attached to either trade 
to the exclusion of the other. 

Sellers' surpluses relatively great. — In point of fact, however, 
one does not usually know precisely what he is going to do with the 
receipts from the goods that he sells, but only that he is going to 
want other things. In view of these prospective and indefinite 
wants he decides what lowest price to accept and then gets all more 
that he can. Here is his seller's money surplus. When later he 
decides what he shall buy, a further buyer's surplus appears as 
a balance between what he does pay and what he would, if necessary, 



MONEY, CREDIT, AND BANKING 269 

pay — the advantage which one purchase offers above any alter- 
native purchase. 

It is now to be recognized that in general the transaction of sale 
affords the larger price differential — which is only another way of 
saying that sellers are commonly more anxious to sell than buyers 
are to buy. Sellers importune buyers rather than buyers sellers, 
and do the most of the advertising. "It is always the seller who 
bribes, never the buyer." ^ It is easier to buy at a bargain than to 
sell at a bargain. The strategic position of the buyer is the stronger. 
The explanation for this generally recognized, but little understood, 
truth is in the fact that the seller has only one choice — that to 
sell or to retain — while the buyer is in possession of a commodity 
offering a wide variety of applications. The producer is specialized 
to his particular trade and practically must take what he can get for 
his products. But money is an option of use, and is an especially 
desirable form of wealth precisely because it possesses this special 
utility of option. Thus, while the differentials between different 
options are not great, the differentials between the good for sale 
and the good commanding the option are relatively marked.. 

Inelastic demand for media. — There is, then, something 
peculiar and especially imperative in the demand for money. 
Upon it as intermediate depend all the advantages of trade — 
all the significance to the individual and to society of the 
assignment of tasks to special ability and opportunity. But 
the chief pressure for it and the larger advantages attaching 
to it are achieved in the process of its acquirement. 

The General Movement of Prices. 

The exchange relations between currency, the intermediate 
commodity, and the other commodities, goods, against which 
it exchanges can evidently be explained only by explaining 
the terms on which possessors of goods are disposed to sacrifice 
them in order to obtain money, and the possessors of currency 
to sacrifice it in order to obtain goods. We are therefore set to 
examine the fixation of the terms of actual exchanges and to 
investigate the forces which determine the actual making of 
these exchanges in all their difference and variety. Why is so 
much wheat offered by the sellers against so much currency, and 

1 Industrial Democracy, Sidney and AHee Webb, Vol. II, p. 676. 



270 THE ECONOMICS OF ENTERPRISE 

so much currency offered by the buyers against so much wheat? 
And why, again, shoes for currency, clothes for currency, 
furniture for currency, lands for currency? And we are all 
the while to hold firmly in mind that the great pressure for 
exchanges is on the side of the seller of the goods for money 
rather than on the side of the sellers of currency for goods, 
precisely because the greater part of the advantages of 
exchange are reaped on the side of getting the money rather 
than on the side of expending it. 

Values of gold with enlarging use as medium. — In a 

primitive society, lacking any conventional medium of ex- 
change, or in any society in the very beginnings of that 
specialization of employment which stamps one commodity 
out of many as especially the intermediate commodity, or in a 
society in which gold, for example, were in the beginnings of 
acquiring the monetary emphasis, the exchange relations of 
gold bullion to other goods would report the fact that no 
possessor of gold could find the opportunity of any further 
marketings of it on terms of getting something for it of a 
marginal utility to him greater than the marginal utility of 
his gold — or, to put the same fact in another way, that no 
possessor of other things could increase his offerings of these 
for gold on terms of obtaining a larger marginal utility through 
gold than the marginal utility of what he had in hand. Any 
forces modifying, for either the possessor of gold or the pos- 
sessor of other goods, these relative marginal utilities would 
disturb the exchange relations between gold and other goods. 
A relatively increasing supply of gold — say through its 
relatively falling costs — would lower its exchange powers. 
So any influence effective to increase the utility of gold to the 
individual holders, its relative utility, would tend to increase 
its different exchange powers. And note that precisely such 
a force to increase its relative marginal utilities is the fact 
that it is coming to center upon itself the function of mediat- 
ing exchanges ; forthwith it becomes increasingly advanta- 
geous to the possessors of other goods to obtain gold for 
them through exchange. 

The sole fact that gold were entering upon the intermediate 



MONEY, CREDIT, AND BANKING 271 

function would tend to enhance its utility, or, more accurately, 
would itself constitute an added utility, and would induce 
the further production of it at higher levels of cost, were it so 
obtainable. Each man with goods to be marketed would 
part with his goods on such new terms as were necessary in 
order to get possession of gold — the medium through which 
he could get those things for which the gold would finally be 
expended. Recall again that the general situation of 
prices reports merely the quantities of other things respec- 
tively which the possessors of these other things will part 
with in order to get gold. 

Relation of commodity uses to use as medium. — It is 
evident also that the utility of gold for other than intermedi- 
ate uses, say for industry or ornament, would have something 
to say for the exchange relations which it would hold when 
used as intermediate, precisely as the intermediate use would 
affect the marginal utilities of gold in its merely commodity 
uses relatively to other things. It might indeed be true that 
the supply of gold were so limited that this need for exchange 
purposes should so far raise its exchange ratios to other 
goods as to retire all the demands for gold for noncurrency 
purposes — excepting to the degree that the demand for orna- 
ment and ostentation were itself stimulated by the very fact 
of its rising exchange ratios. 

Monetary theory distinctive. — Money is doubtless a 
commodity ; but by the nature of its monetary function it is 
in certain very important respects a peculiar commodity; 
there is in the demand for an exchange medium something 
that is entirely distinctive of this demand. In one sense, 
indeed, (a) there is no limit to the demand, while in another 
sense (5) there is no elasticity in the demand. 

(a) No matter what the volume of money, gold or other, 
the exchanging will be mediated by this volume. Taking 
the amount of exchanging to be done as a constant, any larger 
supply of media will be absorbed in caring for this constant 
volume of exchanges. There is no limit to the increasing 
supply that may be employed. The adjustment of the old 
demand to the new supply implies merely that the exchange 



272 THE ECONOMICS OF ENTERPRISE 

power of each unit of the medium must be less. There is in 
this sense an unlimited demand. On the other hand, (6) the 
exchanging must be done, no matter how scant is the medium. 
If the volume of need does not change and the supply of 
media is smaller, there is more for each unit to do, and this 
more must be done at no matter how great a readjustment 
in the exchange relations between money and goods. In 
this sense the demand is absolutely inelastic. The aggregate 
purchasing power of all the money units is therefore an 
unchanged purchasing power, so long as the volume of ex- 
changing to be cared for is an unchanged volume. Neither 
the aggregate product in society nor the amount of exchang- 
ing required by this product is dependent upon the volume 
of exchange media. There is no reason why any buyer 
or seller should forego trading because of the general price 
situation, if only there is no prospective change in prices 
so marked and so sudden as to disturb his decision. The 
need for a medium of exchange in a competitive society 
depends (1) upon the volume of products, and (2) upon the 
degree of specialization of production. Money is the com- 
modity through which as intermediate these ultimate barter 
relations are, in the absence of substitutes, worked out. 
Sellers sell goods for money with which to buy goods. So 
all goods to be exchanged are demands for money, and money 
is in turn a demand for goods. The demand for a medium 
of exchange at any level of general prices is therefore variable 
in the sense solely that the volume of trading changes. In 
general, this volume is variable only (1) by changes in the 
aggregate of products, or (2) by changes in the degree of 
specialization in production. Neither of these changes is 
monetary in origin. 

The fact that the demand for a medium of exchange is practically 
inflexible and is mostly independent of influences connected with the 
volume of media finds its explanation, as we have seen, in the trading 
surpluses hid in every transaction of barter. The money received 
will buy for the seller that which is of greater utility to him than the 
thing parted with. Thus all the inertia and all the momentum of 
our industrial organization are expressed in the demand for media. 
When the volume of exchange media is insufficient for the needs of 



MONEY, CREDIT, AND BANKING 273 

exchange unless on terms of lower prices, these buyers' and sellers' 
— producers' and consumers' — surpluses are forces adequate to 
push the money values up ; that is, prices down. If the supply of 
media is large, there is still the same volume of exchanges, neither 
greater nor less. Thus, the extent and the intensity of the need for a 
medium being given, prices in general must always accommodate 
themselves to the volume of exchanges to be mediated ; and this 
process of accommodation must take place as an alteration in the 
value relations which the medium assumes to the different commodi- 
ties exchanged through it. These conclusions follow necessarily 
from the practically inflexible and inelastic nature of the need. Only 
on terms of suspended exchanges — of social disorganization and 
reorganization — is the demand for an intermediate to be retired. 
The issue is whether the commercial and industrial organization of 
society shall adapt itself to the volume of media, or whether by 
changes in prices the volume of media shall adapt itself to the de- 
mand. None of these changes in price is adequate to retire any of 
the demand for a medium, unless, indeed, the changes are so rapid 
and so marked as, taking place between the receipt of the medium 
and its outlay, to modify in appreciable degree the traders' sur- 
pluses. The level of general prices, therefore, is unimportant to the 
trader. If what he sells changes in price, this does not matter so 
long as what he buys correspondingly changes. The real and 
essential relations of goods to goods are finally in no wise compli- 
cated by the situation of prices in general or by the volume of media. 
So elastic is the demand for media that indefinite increases in its 
volume may be absorbed through a general rise of prices. So 
inelastic — in the other sense — is the demand, that there is no 
upper limit to the values of money — the fall in general prices — 
that an increase in exchanges or a diminution in the supply of media 
may impose. 

Changes in media and changes in prices. — But is it 

true that a changed volume of media must affect all prices 
equally? Other things being equal, such must be the case 
after all transitional adjustments have been completed. 
The increase in the supply of media is an increase which 
applies equally to all the goods that are to be exchanged 
through it. It is true that the increase may not in the first 
instance present itself in this proportional way. If the 
mining camps have more gold, their demand will first ex- 
press itself as a change in the ratios of gold offered against the 



274 THE ECONOMICS OF ENTERPRISE 

goods which mining camps consume. The Klondike or 
Australia will in turn be offering more favorable money 
terms for the things that are imported. These waves of 
influence constantly widen ; the process of leveling up will 
not cease till it is complete. Precisely as money tends to 
flow away from the centers of low prices and into the centers 
of higher prices, till an equality of prices is reached — barring 
the special influences of transportation charges and restric- 
tions of trade — so more purchasing power tends to be 
offered for goods that are still relatively cheap and to be 
diverted from the commodities that are relatively dear. 

Prices affect prices. — It follows, therefore, that no com- 
modity can change in price without forthwith initiating the 
process of change in other prices. Whenever it is true, 
and so far as it is true, that a change in the supply of media 
is not in equal degree and in the first instance a change in 
the currency demand for all commodities, it comes finally 
to be so. It was shown in an earlier chapter that the money 
demand for any good is to be explained only upon the assump- 
tion of an established situation of prices for other goods; 
whether one shall pay a specific sum of media for any spe- 
cific thing depends upon what the media will buy of other 
things. Marginality in purchasing is the point of indifference 
between competing applications of purchasing power. No 
one can decide in what direction to apply his money, his 
purchasing power, unless as the expression of a choice between 
its different applications. Nor can any seller decide upon 
what prices he must have for his goods excepting in view 
of what he can buy with the medium that he is to get. Un- 
avoidably, therefore, prices move up or down together in 
response to a change in the supply of media. 

Paper money affects prices. — The analysis thus far made 
has necessarily implied that the issue of government paper 
as money or of bank funds as money — both circulating 
side by side with gold and actually interchangeable with 
gold as the ultimate money — must absorb a part of the 
demand for a medium of exchange, and must affect prices 
exactly as would an equivalent increase in the supply of 



MONEY, CREDIT, AND BANKING 275 

gold, excepting (1) that by the resulting lowering of the 
exchange ratios of gold the gold itself would be somewhat less 
rapidly produced at the mines, and (2) that the new issues of 
paper money would themselves bear in turn as a demand upon 
gold — these new issues requiring in some degree the use of 
gold as redemption money or as reserve money. 

Supply of gold affects the marginal utilities of it. — Re- 
turning, however, for a moment, to the simple conditions 
of our original assumption, that of the sole use of gold as 
money in a primitive community : As the gold becomes more 
plenty — as, for example, through larger supplies from the 
mines as its costs of production are diminishing — its relative 
marginal utilities to different individuals for commodity 
purposes are falling ; thus the buyers of it, the sellers of 
goods, are compelled to give up smaller volumes of the 
various goods in order to get it. 

Applying now the principle to the actual problem : The 
cost of production of the currency commodity — so far as 
the supply is conditioned upon cost of production — is 
related to currency values precisely as to the values of other 
goods — through the effect upon the supply. But when 
the total supply of any good is very great relatively to the 
output of any year — which is necessarily the case with 
money, only a small portion of the continually offering prod- 
uct disappearing through consumption — cost of produc- 
tion must work slowly and tardily as an influence to modify 
the exchange relations of that good. The long-time equi- 
librium of prices under stable conditions is, indeed, in large 
part the point of adjustment between the cost of production 
of gold and the market demand for it either for money or for 
commodity uses. But since the conditions of demand are 
unstable, both on the side of the products seeking exchange 
through gold and on the side of the quantity of other media, 
the point of stable equilibrium is always in process of being 
approximated, but is never reached. 

Banks, supply of media, values of media. — But now 

assume that banks exist and that through them the oppor- 
tunity is open to individuals to obtain — by paying the banks 



276 THE ECONOMICS OF ENTERPRISE 

for the issue of it — credit currency equally serviceable 
with gold in the buying of goods. Instead, that is, of giving 
up goods for the medium, the bank customer obtains this 
medium upon terms of making promises to the bank and 
of paying it a discount — or interest or underwriting — 
rate. How much of this new medium will be provided? 
So much as the borrowers will pay the bank for issuing, as 
equated against the rising terms at which the banks, in view 
of the increasing cost of issue to them, are disposed to issue. 
Security offered : rates offered. — The amount of currency 
which the bank will consent to furnish to the borrowers 
will in part depend upon the security which the different 
customers can offer, and in part also upon the rates which 
they will consent to pay. The customer may have property 
which he can offer as collateral, by pledge or by mortgage 
— property which he could sell were he so disposed, but 
which, rather than sell, he would prefer to use as security. 
Or he may be able to pledge to the bank property or income 
which, more or less securely, he has the prospect of getting 
later. Or the bank, without requiring a specific pledge 
or the conditional promise of some surety or indorser, may 
lend upon a general faith in the customer's paying power 
later to accrue. Many men, for example, borrow upon the 
prospect, and sometimes upon the pledge, of later salary 
receipts, or upon the expectation of a harvest to be reaped 
in the fall, or upon the goods which will be manufactured 
and ready for the market when the promised time of payment 
arrives, or upon the cattle that are being fed for beef. A 
debt secured by character is as good as any other, if only 
it be as secure. In point of fact, the amount of funds which 
a borrower can secure from a bank is commonly not limited 
to the net property or wealth of the borrower. Borrowing 
is always essentially a promise of payment out of future 
paying power, in return for which promise the banker creates 
an immediate current purchasing power in terms of deposit 
credit. The net resources of the customer, " what he is 
worth," are to the purpose only as one item of evidence as 
to what he will in the future be able to do — only as one of 
the bases on which future control of purchasing power may 



MONEY, CREDIT, AND BANKING Til 

be relied upon from him. Most commercial loans are indeed 
loans upon the expectation that the borrower will have future 
receipts and are secured finally by the prospective future 
marketable product. The bank holds claims against the 
production that is to be. Borrowing to obtain present pur- 
chasing power is much more largely for purposes of future 
production than of present consumption. Thus the expected 
selling price not only motivates the borrowing of the entre- 
preneur, but, in the larger part, fixes the limit to which the 
lender is disposed to go in the extension of credit. The 
borrower's resources are a guaranty fund, a margin, a reserve, 
upon his operations. The activities of commercial banking 
are something far more extensive than the coining of present 
wealth into present purchasing power. 

Supply of credit responds to rates offered. — Thus the 
intending buyer — either of a consumption good or of any- 
thing else that requires funds for its control or absorbs 
funds in its hire — labor, land, raw materials, advertising — 
finds currency at his disposal, if only he is willing and able 
to offer against the present funds, the currency, either present 
goods for immediate sale or a satisfactory promise to return 
to a lender future goods or future currency. Through the 
mechanism of lending, therefore, expected future goods and 
future incomes function in varying volume as present cur- 
rency. At any given time the volume of currency offered 
by any particular bidder for any particular good, and the 
exchange relations established thereby between the goods 
and currency, depend in part upon what present goods the 
intending purchaser offers for currency as his demand for 
currency, in part upon what currency he can borrow and 
the terms at which he can borrow, through pledging his 
future paying power to the bank as the basis on which it 
advances to him a present paying power. 

Bank funds affect exchange ratios of media. — Not only, 
then, does the activity of the bank place its customers in 
the position to offer currency, purchasing power, against 
goods, but this purchasing power becomes also, in the hands 
of any earlier or later holder of it, a part of the currency 
in general circulation — brings about a larger volume of 



278 THE ECONOMICS OF ENTERPRISE 

intermediates of exchange, and as it moves along affects 
the exchange relations between goods and money, currency. 
Prices in general are nothing but the summing up into an 
average of all these different prices of commodities as they 
are separately determined. 

It is not, however, true that these separate determinations 
are arrived at independently of the total volume of media 
in circulation or independently of one another. Prices 
move together, simply because purchasing power, as an 
option of use in making purchases, can be used for buying 
one particular thing only as the outcome of a choice between 
what it will buy of this one thing compared to what it will 
buy of something else. Low prices on the alternative goods 
direct purchasing from the particular good to those other 
goods ; so rising prices on the particular good tend to redis- 
tribute purchasing power toward the alternative goods. 

Gresham's Law : International trade. 

And not only do prices in any one country move together, 
but prices the world over tend to move together — allowance 
being made for transportation charges and for restrictions of 
trade, e.g., by tariff laws. If, somehow, the prices of any one 
good in one country come to be higher than the prices in 
other countries, exports of this good are restricted and imports 
stimulated. Domestic producers prefer to sell at home ; 
foreign producers tend to seek this better market. These 
effects are still more strongly marked where the domestic 
situation is one which has tended to push up all prices. It 
is evident also that, merely through the mechanism of prices, 
any restriction upon the importation of goods from abroad 
must also finally restrict exportation. If imports are pre- 
vented in offset of exports, money must make good the 
international balance. Prices therefore rise in the country 
of expanding currency supply, and fall in the countries from 
which money is drawn. Forthwith there sets in the disposi- 
tion of the domestic producer to sell at home and of the foreign 
customer to buy elsewhere. The protectionist needs to recog- 
nize that to prohibit imports is ultimately to prohibit exports. 



MONEY, CREDIT, AND BANKING 279 

The principle of what is known as Gresham's Law, "Bad 
money drives out good," is essentially similar. 

Any commodity, gold or other, falls in its exchange 
values as it becomes more plenty, whether by lower cost 
of production or by other influences. More must sell 
cheaper in order to market all. Thus, less and less insistent 
demands come to absorb a part of it; old demands reach 
larger satisfaction; new demands are uncovered. Likewise 
when two commodities are adapted to the same or to similar 
purposes, a change in the supply of either, or in the demand 
for either,- has much the same effect upon the exchange rela- 
tions of the other as would follow from a change in the supply 
of that other or in the demand for it. 

Expansions by silver or paper or credit. — Thus, coinage 
of silver to be circulated side by side with gold and as sub- 
stitute for it, or the issue of paper money, or the expansion 
of credit circulation must, as an increase in the supply of 
circulating medium, lower the exchange values of the money 
unit. This fall in the exchange powers of money, this rise 
in prices, this weakening in the money hold upon the money 
medium, releases in some measure that part of the circulating 
medium which is the object of the stronger outside demands. 
Essentially, therefore, expansion by cheaper money, or by 
paper or credit substitutes, does not differ from expansion 
through an increased supply of the original and dearer ma- 
terial — excepting that, in the case of an addition of money 
of a cheaper material, all the outflow is confined to the dearer 
money, the cheaper continuing in the money function and 
tending more and more to the exclusive performance of that 
function as the dearer money flows out. 

Any rise in prices, therefore, whether general or local, 
not only reduces the purchasing powers of the money unit, 
but, also, with the outflow of the one metal used or of 
the dearer of the different metals used, lowers equally the 
values of that metal in its commodity use and in* its money 
use. 

Local movements of prices. — Likewise any local rise 
in general prices, whether due to a local money expansion, 
or to credit extension, or to any other cause, stimulates. 



280 THE ECONOMICS OF ENTERPRISE 

as we have seen, an outflow of the money metal abroad ; the 
bullion tends to flow to the most favorable market for it. 
Precisely as in domestic movements any inflation or expansion 
makes a better market for some forms of money outside of 
the commodity use than in it, so, in international trade, the 
local expansion makes some portions of the currency more 
desirable for buying abroad than for buying at home. The 
currents of trade are disturbed. 

Danger in currency experiments. — Bearing these facts in mind, 
the futility of any local effort toward an increased currency is evi- 
dent. So, also, with the attempt to retain a market for goods 
abroad, unless on terms of permitting imports of foreign goods. 
So, again, any national excess in the issue of paper money must 
mean in some degree the loss of the international medium from the 
domestic circulation. Likewise national bimetallism must involve 
a rise in domestic prices, a progressive export of the international 
medium, a currency tending constantly to contain a smaller share of 
international medium and a larger share of the substitute, and, al- 
most unavoidably in the final result, monometallism on the basis of 
the cheaper metal. (See p. 321.) 

Commercial Crises. 

Circulating and other credit. — Not all credit devices 
serve as economics in the use of money. Where items in 
open account offset each other, the economy is manifest. 
Where credit circulates, the economy is manifest. But the 
mere granting of credit, awaiting a later settlement, does 
not lessen, in the outcome, the demand for money, but 
merely postpones it. Credit must be used by transfer as 
payment or as quid-pro-quo before it works as substitute for 
money. Nevertheless, this noncurrency element in credit 
is none the less credit, and in the making up of disaster is 
as important as any other. 

Pre-panic conditions. — The period preceding a financial 
crisis is commonly a period of seemingly great prosperity. 
There is a popular impression that such prosperity is a mere 
seeming, and that panic is in the nature of a necessary 
collapse. It would be going too far to claim that no bubbles 
are formed in the course of business expansion, or that these 



MONEY, CREDIT, AND BANKING 281 

bubbles are not sources of financial danger ; but, speaking 
generally, the popular impression is a mistaken one. The 
years preceding a panic constitute a period of great indus- 
trial activity and of great productiveness. Wage earners 
have been well employed ; transportation and merchandising 
have been in smooth and successful operation. At the close 
of the period it will be found that the wage-earning classes 
have rarely been as well housed, as well clothed, or as well 
fed. They are exceptionally well supplied with the smaller 
conveniences and comforts of life. Measured by their own 
standard, the laborers are prosperous in pleasant homes 
and large personal belongings. In the aggregate, they repre- 
sent a large total of material wealth. The farms were never 
under better cultivation, the herds larger, the buildings 
more substantial or in better repair, the homes better fur- 
nished. Likewise of the manufacturer and the merchant; 
never were there larger stocks or more warehouses bursting 
with merchandise. Never were factories daily pouring forth 
more goods. Turning to general conditions, it will be found 
that these prosperous years have rebuilt cities in brick, 
interlaced states and even continents with railroads, dotted 
the prairies with farmhouses, beautified them with fields 
of grain, and covered them with herds. The period has 
been one of widespread plenty, of remarkable industrial 
activity and efficiency, of boundless energy and hope. It is 
strange, it is even impossible, that extensive building opera- 
tions should, in themselves, result in houseless exposure ; 
that overflowing granaries and fattening herds should foster 
hunger, or that warehouses of cloth should be the sufficient 
cause of nakedness. It is doubtless true that these meshes 
of railroads, these cities of brick and iron, these immense 
factories and fattening herds are largely the outcome of 
reckless hope and borrowed capital ; yet it all counts in the 
world as wealth ; it is here. That the capital is borrowed 
chips nothing from this fact. 

Where the dangers lie. — The elements of danger are not 
to be found in the industrial situation, which was possibly 
never so prosperous in thorough efficiency and organization. 
The difficulty is financial. 



282 THE ECONOMICS OF ENTERPRISE 

We have seen that the volume of exchanges is the basis of 
the demand for currency ; to double the volume of currency 
without increasing the number of exchanges, is ultimately 
to double prices. To halve the currency is to lower prices 
approximately in the same ratio. These propositions are 
unquestionable ; they hardly reach the dignity of principles 
— they are mere mathematics. Yet, strangely enough, 
as applied to the facts of industry they are seemingly untrue. 
Prices almost uniformly rise with increasing activity in 
business, and fall with failing business. This is apparently 
to say that the values of currency fall with an increased 
demand, and rise with a failure of demand. 

Why prices have risen rather than fallen. — The explana- 
tion is found in the fact that, with expanding business, 
the currency also expands, and, commonly, in a degree 
more than proportionate to the demand for it. This increase 
takes place not ordinarily in the money element, but in the 
element of credit. Reviving credit always characterizes re- 
viving business. Under the existing system, credit furnishes 
for currency the only element of ready adaptability. It 
furnishes, for ordinary conditions, the guaranty of steady 
market prices. It avoids an enormous application of human 
energies to the production of commodity currency. Without 
it, great expanding business operations would carry with 
them their own restriction in falling prices and vanishing 
profits. 

The debacle explained. — But these advantages are 
purchased at the risk of enormous dangers. The commercial 
crisis marks the period when money takes on abnormal 
scarcity and abnormal values from the fact that substitutes 
for money — credit currency — contract in volume. The 
very height of the credit fabric measures the disaster of 
its fall. It is at the full tide of prosperity that the danger 
is greatest. If, then, for any reason, whether of extravagance 
at some point, or of overproduction in some industries, 
or of failure of harvests in some districts, or of overspecula- 
tion, or even of business prosperity carried to the point of 
overstringency in the loan market, there sets in a contraction 
of credit, trouble begins. The debtor can pay only by calling 



MONEY, CREDIT, AND BANKING 283 

in turn upon his debtor. The pressure for payment increases 
in ahnost geometrical progression. Not only does credit 
largely disappear from circulation, but the burden of liqui- 
dating existing indebtedness is thrown upon the legal tender 
and the unquestioned elements of the currency. Panic- 
stricken marketings of commodities, and panic-stricken 
or speculative withdrawals of money from the channels 
of business further complicate the situation. Endless 
ruin and disaster follow ; prices tumble ; this is panic, when 
even the rich seem poor, when business is stagnant, exchanges 
are restricted, laborers are unemployed and in want. Imme- 
diately preceding it were the headlong rush and exultant 
activity of prosperity, — when all men were hard at work, 
though doubtless overconfident, and possibly overventure- 
some. And now follows the destruction of wealth. In 
the course of ample credit, things had arranged themselves 
in the hands of those who knew best how to use them. Now 
ensues an enforced redistribution. In the outcome one man 
finds himself with two houses, and can use but one ; or with 
two horses, and needs but one ; and with endless steam 
engines and trumpery and stocks in trade of which he wants 
nothing. He can only let the property grow old or rot or 
rust. The wheels of the factory stand still ; industry has 
dropped its tools ; and all this, not because there was too 
little wealth, or too much, but because what there was, 
was badly arranged to withstand a flurry in credit. 

The case for credit. — It is clear enough that panic is 
an ebb in credit, and that in proportion as the intermixture 
of credit in currency is large, is the disaster great. Whatever 
may be the ameliorations possible, the gravity of the case 
is not to be questioned. Here is the most noticeably weak 
point in the modern competitive system. Anything which 
shall offer a reasonable hope of displacing credit from its 
enormous development in modern business can hardly be 
other than good fortune. The money of ultimate redemp- 
tion is too small for the credit fabric built upon it. It is 
like a cone resting on its apex. This delicate and unstable 
equilibrium is a condition fraught with constant danger. 

Doubtless so long as credit works, it affords desirable 



284 THE ECONOMICS OF ENTERPRISE 

economies in the use of bullion currency and, in some measure, 
steadies prices. England succeeds in managing a much 
larger per capita volume of business than does France, and 
with a much lower per capita supply of bullion currency. 
But periodically England suffers acutely from the commercial 
crisis, while France is relatively exempt. The losses probably 
outweigh the gains. 

Devices for amelioration. — That which most naturally suggests 
itself as a remedy, is to enlarge the currency basis, — to declare that 
more money of ultimate redemption is needed ; therefore start the 
printing presses or coin silver. But remember that it is the shape 
of the pyramid, and not the size of it, which is matter of concern. 
Unless there is found to be some tendency in silver coinage, or in any 
other form of expansion, to lessen the volume of credit relatively to 
money, the inflation argument fails. 

There is no such tendency. Silver expansion, or any other ex- 
pansion, would be followed by a rise in prices proportionate to the 
expansion. The degree in which credit circulates depends upon the 
methods of business and the organization of industry, and not upon 
the kind of money. So long as manufacturers find it advantageous 
to borrow capital, so long as wholesalers take credit from retailers, 
and all deposit their funds in banks and pay through checks and 
bookkeeping, so long must the intermixture of credit remain an 
element of danger. In truth, the very bulkiness of silver would, 
in itself, tend somewhat to increase the inducements to deposit 
methods. 

Nor is there any great hope that these credit methods will cease 
because of their dangers. The advantages and conveniences to 
the individual business man are too pronounced. Here, again, 
individual interests are not parallel with the general interest. No 
one business man could afford to stop unless all should stop, and each 
would gain by violating the rule intended for all. The remedy, if 
any is possible, lies in the discovery of a currency effectively flexible 
in time of need. 

Wiser organization of banking. — The foregoing dis- 
cussion does not, however, imply that the banks, which are 
the ordinary sources of credit currency, can do nothing as 
they are now organized against the breaking out of a panic, 
to intervene to prevent its further development when once 
it is started, or to mitigate its severity when once it is sen- 



MONEY, CREDIT, AND BANKING 285 

ously under way. Nor is it true that, with better organi- 
zation, the banks might not do even better than to arrest 
or to ameliorate. How, in fact, should panics be handled 
by the banks? 

The policy of more credit. — The panic cannot be con- 
trolled, once it has started, by any policy of restriction of 
credit, but only by generous extension. The creditors 
are hurrying their debtors mostly because of the danger of 
being themselves hurried, or because of the danger that delay 
may mean that some other creditor may by his prompti- 
tude make himself the sole creditor paid or the sole creditor 
obtaining adequate security. Were really solvent debtors 
sure of obtaining credit in case of serious pressure, there 
would be few creditors to press them. 

In fact, also, if the creditors were sure of credit for them- 
selves in case of need, there would be the less occasion for 
pushing the debtors. And if these creditors, in turn, were 
not in danger of being pushed by other creditors, themselves 
straitened in credit and themselves fearful of the possible 
failure of the debtor to obtain credit under serious need, 
this last occasion of credit pressure would be mostly removed. 
The banks stimulate a call upon themselves for credit by X, Y, 
and Z, when the banks refuse credit to the men in whose power 
it is to hurry X, Y, and Z. And if the creditors of X, Y, and 
Z make demands upon them, and the banks refuse to give 
credit to X, Y, and Z, these men are driven, in their turn, 
to place pressure upon still other debtors. The hurry grows 
with the restriction of credit, and the further restriction of 
credit adds to the hurry. The process is a geometrical 
progression. And immediately that no one can get credit 
to pay with, there is a frightened scramble to enforce pay- 
ment in money, to get money to pay with, to hoard money 
against possible necessities. The attempt of the banks to 
hold fast to their reserves is the very force which is prompting 
the taking of them away; depositors under pressure are 
withdrawing funds to meet claims in other centers, or, sus- 
picious of the continued ability of the bank to pay upon de- 
mand, or suspicious of the ultimate solvency of the bank, are 
calling for cash to be hoarded. The fact that it is not nee- 



286 THE ECONOMICS OF ENTERPRISE 

essary that a stringency have already arisen in order to bring 
about the panic stringency, but that only the menace of strin- 
gency is necessary, is well illustrated in the London market. 
The Bank of England has no authority to issue more than a 
limited fund of notes, otherwise than as mere warehouse 
receipts for deposited gold; and the legal limit of its un- 
covered issues is always full. If, then, panic develops, 
reserves are falling, and the situation becoming acute, the 
government is likely between two days to promise the later 
legalization of such illegal issues of notes as the Bank may 
find necessary. The announcement next morning of this 
authority and of the Bank's disposition to use it is, not rarely, 
enough to stem the rising waves of disaster. The terror is 
allayed. As soon as it is clear that all who need credit and 
deserve it can get it, no one is in a hurry to borrow for possible 
emergencies, or to push his debtor, or to hurry to pay off 
his creditor. Business returns to its normal pace and move- 
ment. The Bank need not have made even the slightest 
use of its privilege. 

Here in America, however, the reserve limit fixed by law 
deprives the banks in times of need of their only power of 
service. Reserves are mostly waste money till this time 
of need, and then they are forbidden their only proper 
function. They are the more rapidly drawn out by the 
depositors as the granting of credit is the longer refused, 
and as the credit conditions become less and less adequate 
for business requirements. And each dollar of withdrawn 
reserve means the calling and the canceling of several dol- 
lars of credit substitutes. 

Organized versus disorganized banking. — Most experienced 
bankers would promptly take issue upon the assertion that, for 
$1000 of increase in reserve funds, from $4000 to $7000 of loan 
extension is possible. These bankers would argue that out of a 
$1000 loan the checking operations of the borrower will carry $800 
of the borrowed funds into other banks — that only something like 
$1250 of increased lending is possible through an inflow of $1000 of 
reserves. 

From the point of view of the isolated bank, this criticism is 
undoubtedly well taken. Only in case the bank in question were 



MONEY, CREDIT, AND BANKING 287 

the only bank in a community, and in the degree that the community 
were isolated in business relations from other communities, would it 
be true that the credit granted by the bank which received the re- 
serves could be very greatly extended. But it is still true that 
the same total amount of extension would be possible, only that 
this would be possible not, in the larger part, by the bank first ob- 
taining the reserves, but mostly by other banks. The granting of 
credit by the one bank means the transfer of reserves to other banks. 
Each bank, as it, in turn, lends to its customers, is losing reserves to 
other banks, but is, in turn, gaining reserves at the expense of the 
other banks — if at the same time the banking activity of these 
other banks is maintained. Here, as elsewhere, the economic 
process appears one way as an aggregate and another way as viewed 
in its competitive and separatist aspects. 

Commonly, however, in the banking field, the two lines of analysis 
converge in their conclusions. The competitive analysis, as the 
actual analysis, is merely somewhat the more detailed and difficult. 
But there is no essential need of this doctrinal unity anywhere ; nor 
always do the facts of banking support it. In truth, it often happens 
that, so far as any one bank is lending, it is losing its reserves to other 
banks that are not lending. And it is not rarely true that each 
particular bank is deterred from lending by the possibility that 
other banks are not going to lend : or, again, it may be true that any 
particular bank is actually prohibited from lending by the fact that 
the other banks have stopped lending. 

Expansions and contractions of banking credit. — The fact is that 
as banks by extending their credit accommodations create the 
situation in which panic is possible, so, by a restriction of credit, 
they may actually bring on panic, or by their mutual suspicion and 
their lack of a harmonious and coordinated policy, may seriously 
aggravate a panic which has already got under way without their 
fault. 

The responsibility. — Where, at any given time, the re- 
sponsibility for panic ultimately rests, may be difficult 
of determination. But it is a practical certainty that, in 
a system of separate and uncoordinated banking enterprises, 
the banks will themselves make immeasurably more serious 
whatever serious thing may happen. If banking is to furnish 
for ordinary times the bulk of the circulating medium, 
banking must continue to furnish it for all times. Otherwise 
there must be recurrent disaster. The general situation of 



288 THE ECONOMICS OF ENTERPRISE 

prices which goes with the credit circulation of banks cannot 
be maintained in the absence of this circulation. There 
must be no credit or there must be permanent credit. 

Double-counting of reserves. — The difficulty is not 
precisely in the fact that some banks purport to hold in large 
part — but actually do not hold — the reserves of other 
banks ; that under our system of redepositing reserves, 
more than three fourths of the reserves, computed as some- 
where else, are really not where they are supposed to be, 
but are, instead, still somewhere else — where, in turn, they 
really are not, — and that, therefore, in times of stress the 
banks themselves are the most serious sources of pressure 
upon one another, — that the banks are not only themselves 
among the very depositors whose calls are so disastrous, 
but are, of all the depositors, the ones likely to be first in 
their calls, - — although all this is serious enough ; the ultimate 
difficulty is that the very process by which all the banks 
at once are trying to strengthen their reserves is an altogether 
impossible process — a paradox — a death-blow at the very 
fundamental principle of banking. Any general attempt 
to convert banking paper or deposit credit into gold must 
promptly issue in a lamentable collapse of the whole credit 
machinery. The last people to make this attempt should 
be the bankers themselves. If other interests attempt it, 
the bankers' duty is to intervene to save the situation. The 
attempt must in any case fail, but all sorts of calamity must 
attend this effort at the impossible. When the banks 
themselves join in the scramble, the last hope of supporting 
the credit fabric has vanished. 

There are, then, two serious defects in the organization 
of American banking, (1) the double-counting of reserves, 
(2) the many-reserve system, — an evil seemingly on the 
point of receiving its long-deferred remedy. 

The double-counting of reserves is clearly dangerous. But 
the pressure by one bank upon another is merely made a 
greater pressure, an aggravated difficulty, through this dupli- 
cation. It is not the less important, however, to understand 
how the system, under its present organization, actually 



MONEY, CREDIT, AND BANKING 289 

works ; it will thereby become so much the clearer how the 
system of independent and separate reserves must inevitably 
work, even though all the duplications were avoided. 

So long as fair weather continues, it does not much matter 
where the reserves are, or even whether there are any. A 
system including both the principle of separate reserves and 
of reduplicated reserves may, for so long as it works at all, 
appear to offer all the strength and flexibility that a system 
of conjoined and centralized reserves could offer. But 
recurrently the present system does not work. The ultimate 
reserves — what, in last analysis, there are of them — are 
in large part held in New York. When trouble sets in, the 
25,000 banks in the country set themselves to tear down this 
central reserve — each one trying to weather the storm 
by the help of what little it can snatch from the general 
emergency fund. Under this manner of treatment the fund 
promptly disappears. 

The ultimate evil. — And yet, as has been already indi- 
cated, the system of reduplication of reserves serves merely 
to aggravate a much more serious and, indeed, a fundamental 
evil. We have seen that when credit is being granted freely 
by all the banks, the accommodations made by each bank 
work out to distribute the aggregate reserve with something 
like proportionality among all the different banks. As one 
bank, by its creation of deposit liability, is drawing down 
its reserves, other banks are, as the direct result, reenforcing 
their own reserves. Similar discounting activities on the 
part of other banks are, in turn, making good the reserve 
withdrawals from the first bank. In practical effect, then, 
in times of easy and normal credit, the reserves are really 
combined. Each bank can shift its loans to other banks. 
By contracting its loans, it can always reestablish the desired 
ratio of safety between its reserves and its demand liabil- 
ities. 

When contraction comes. — But this method of safety is 
evidently open only on the condition that the banking com- 
munity in general is not making a like attempt at contraction. 
If the movement becomes general, the only safety for each 
individual bank is in its refusal to hazard its reserves either 



290 THE ECONOMICS OF ENTERPRISE 

by the granting of new credit or by the extending of the old. 
An insensate scramble for one another's reserves sets in. 
That which was stringency develops into panic. The differ- 
ent banks in the aggregate system are now working at cross 
purposes. The fund which was held as reserve for any 
emergency threatening the general stability of the system, 
and for the maintenance of the general credit circulation, now 
functions merely as hard-held funds which are not available 
for use at such points of weakness as develop. A still more 
severe and more serious pressure comes to be exerted as more 
loans are called to reenforce reserves. This process, in turn, 
cancels more and more deposits. The system is working as 
an automatic multiplier of the initial pressure. Those 
independent banks which achieve safety in the rout, achieve 
it only on terms of the sacrifice of many of their customers. 
Effects of restriction. — The aggregate result is that the 
circulating medium, which it is the accepted duty and func- 
tion of the banks to furnish, has in large part disappeared. 
The business world must get along as best it may under this 
radical restriction of credit and of credit media of exchange. 
With the attempts of debtors to pay their notes through 
marketing their possessions, prices tend to fall. The more 
frantic the attempt at marketing, the more rapid and the 
more marked the resulting fall. Especially severe and heavy 
is the marketing of those securities deposited as collateral 
with the banks. With the forcing of these collaterals upon 
the market there goes a still further depression in the market 
prices of them. And with the falling prices, the banks are 
calling for wider margins of collateral or for the immediate 
payment of the secured obligations. At the theoretical limit 
of the process the typical bank will have reversed its original 
process of note extension and will, if its frantic attempts have 
availed, have returned to its first morning's calm, with 
$100,000 of cash in hand, with no notes in its portfolio, and 
no borrowers' deposits as liability, but with a farcically safe 
and conservative ratio of reserve to demand liabilities. 
Counting also the money which has accumulated in its vaults 
as the result of that ordinary and current deposit unrelated 
to the loan activities of the bank, the bank will show not 



MONEY, CREDIT, AND BANKING 291 

merely an extraordinarily large reserve relatively to its lia- 
bility, but extraordinarily large reserves as an absolute 
volume. 

Illustrations of the process just analyzed are readily found : 
For the fourteen years following specie resumption in the United 
States, and preceding the panic of 1893, the ratio of net cash to 
demand liability for the aggregate national banks of the United 
States had run approximately at 20 per cent, with the absolute 
volume of cash reaching its maximum of 400 millions in 1892, while 
the net liability was at a minimum of 1900 millions during the year 
1892 and in the early winter of 1893. Six months later, after the 
disastrous summer of 1893, the net demand liability had fallen to 
1600 millions and the cash holdings had, in early 1894, risen to 480 
millions — a point never before reached and not later reached till 
1899. This increase of reserves was obviously not merely an in- 
crease from 20 per cent to 29 per cent of the demand liability, but 
was also an absolute increase of 80 millions in the holdings of cash. 
A parallel, though not an equally dramatic, illustration of the 
same tendency could be drawn from the experiences of 1884 and 
1907. 

Where is the fault? — No criticism is here intended against the 
banks in the carrying on of their separate and independent func- 
tions, or against the managers of the banks, but only against the 
actual organization of the banking system. The bankers are merely 
the servants of the system in which they work ; they have no choice. 
But the fact still stands that the leading and characteristic feature 
of the ordinary panic is the abdication by the banks of their function 
of maintaining credit. 

The sequence of contraction. — Taking it to be true that 
the commercial crisis is a phenomenon of the contraction of 
credit, it nevertheless remains to inquire as to the sense in 
which this is true. Is it either primarily or exclusively a 
contraction of bank credit, or rather a contraction of credit 
generally? Or is it merely a contraction in some other spe- 
cific kind or level of credit? May it not be a process of 
restriction confined to what may be termed voluntary credit, 
as over against a remaining volume of credit which is refusing 
to contract and which is even expanding? 

It appears, indeed, to be in need of recognition that, al- 
though the acute stage of crisis is purely a matter of credit 



292 THE ECONOMICS OF ENTERPRISE 

contraction, it does not follow — and it is not true — that 
the aggregate volume of credit is diminishing. The process 
of restriction is proceeding only in certain departments of 
credit or upon certain credit levels, while credit is elsewhere 
manifesting precisely the contrary tendency. Side by side 
with the diminution of bank credit there is taking place an 
enforced and inevitable expansion of credit relations between 
producers and consumers, producers and middlemen, and 
between middlemen and consumers. 

At this nonbanking level of credit must be sought, in fact, 
the explanation for the more serious of the ultimate difficulties 
characteristic of the crisis phenomenon. So far, indeed, as 
crisis confines itself to a mere contraction of bank credit, so 
far, even, as its effects extend no further than a general re- 
appraisal of goods in terms of gold — a readjustment of 
prices — nothing is taking place of essential significance to the 
interests of society as a whole. It is only as the financial 
strain somehow translates itself into an interference with 
the processes of production and consumption that the real and 
essential and ultimate harm is disclosed. 

What, then, is the method of this translation, the rationale 
of its working? Why are manufacturers closing their mills 
and discharging employees ? 

The ultimate social injury from crises has sometimes been 
interpreted purely in terms of disturbed production reacting 
upon consumption, sometimes also in terms of reduced con- 
sumption reacting to limit production. 

Restricted consumption. — Space must fail to do immedi- 
ate justice to this second view — a view containing much 
truth, and truth of the greatest significance. (See pp. 300-6.) 
Some part of the difficulty does really lie in the fact that, 
scared or depressed by the purely financial commotion, con- 
sumers are refraining from consuming. In this aspect of the 
problem, nothing appears to be the trouble excepting the 
sheer indisposition to consume, a temporary and extreme 
economy, an overmarked preference for postponed consump- 
tion as against present consumption. Acting under similar 
influences, retailers are also doubtless manifesting a similar 



MONEY, CREDIT, AND BANKING 293 

psychology ; they are allowing their stocks to run low ; 
temporarily they are adopting the policy of living from hand 
to mouth. And as the mere restatement of this fact, orders 
are ceasing to come to the wholesaler, and employment is 
becoming scant at the sources of production. 

Doubtless the problem is extremely complex ; a full treat- 
ment of it must allow for the bearing of such influences as 
first express themselves in a reduced consumption and only 
so react upon production. But the concern of the immediate 
analysis is solely with the influences first impinging upon 
production, and only secondarily affecting consumption. 

Restricted production. — How, then, does the panic work 
out to tie up production ? In some small part, doubtless, by 
uncovering insolvencies not due to the panic, but only dis- 
closed by it ; in some part, also, the panic causes insolvencies 
through bringing about a fall in the prices of securities or of 
stocks of goods, or, possibly, through necessitating an impera- 
tive call for the immediate liquidation of credit relations that 
cannot be liquidated immediately. 

Production and credit. — But in the main the " slowing up 
of business," the restriction of production, is not a phenome- 
non of insolvency ; in the main, also, even where it is an in- 
solvency phenomenon, it is merely as another effect of the 
very causal influences which it is the present purpose to ana- 
lyze. Restriction of production is mostly due to a disastrous 
redistribution in society of the function — or the burden — 
of supplying credit. For, as has already been noted, the 
immediate or early effect of crisis is not to diminish credit. 
Credit contraction is really a matter of very slow accomplish- 
ment ; the stringency period is merely a period of the redistri- 
bution of the function of carrying credit. 

In the early days of November, 1907, two or three weeks 
after the crisis of that year had declared itself, a small man- 
ufacturing wholesaler in Chicago reported to the present writer 
that collections had in two weeks shrunk from about $1000 to 
$500 a day, while raw materials and other outlays were run- 
ning at about $650 per day. Shipments were still maintaining 
their usual mark of $1500. But two weeks later the report 
was to the effect that collections had fallen to about $250, 



294 THE ECONOMICS OF ENTERPRISE 

sales to about $600, and that customers were sending in their 
notes and asking time. The Chicago banks, however, were 
refusing to discount these notes. In essentials, the case is 
typical. 

What does it all mean as seen from the point of view of the 
entrepreneur and of the productive process? Simply that 
there is as yet taking place no contraction of credit, but 
merely that the manufacturer or jobber — either of whom is 
for the most part an intermediary in production — is having 
to carry the credit ; the banks have abdicated their function of 
credit issue. Whether this is necessarily done does not con- 
cern the present analysis — it is done. What shall the whole- 
saler do — press his customers ? But this is bad business 
in the long computation, and, besides, is likely to be ineffective. 
Refuse them further goods ? But this is inexpedient as long 
as the customers are actually responsible. The customer also 
finds himself in a precisely similar situation with regard to 
his own trade; he has to wait on his customers. On this 
level of business activity credit is successfully resisting con- 
traction and is effectively pressing for expansion. 

But on the basis of having to carry his customers — not 
merely on accrued accounts, but for further shipments — the 
wholesaler or manufacturer must shortly meet the necessity 
of curtailing or abandoning production. And note that all 
this must hold true, even though the banks do not also move 
toward cutting down the line of credit usually granted. In 
any case, the pressure upon the wholesaler or the manufac- 
turer for credit is an increasing pressure from his customers. 
Credit on this level is temporarily expanding. But this is 
an impossible process if attempt be made to carry it appre- 
ciably far, concurrently with the refusal of the banks to 
grant an increasing accommodation. Producing and distrib- 
uting are therefore subjected to paralysis. 

Responsibility and credit. — Nor does it greatly matter, 
for the purpose, how unquestionably solvent the manufac- 
turer or the jobber may be, or how great claim he may have to 
credit by title of financial strength. The difficulty is not 
that his net resources are not adequate for all purposes of 
protection to the bank by way of indorsement and guaranty. 



MONEY, CREDIT, AND BANKING 295 

The banks refuse the credit ; the manufacturer and jobber 
have imposed upon them this function. But manufacturing 
and mercantile businesses are at the farthest possible remove 
from the ability to stand as ultimate purveyors of credit. 
Banks are properly organized to do the thing, because they 
have the machinery for the making of one man's deferred- 
payment promise into immediate purchasing power for the 
promisee. This is, in fact, the leading significance of the 
deposit-credit system. But the middlemen in production or 
in commerce have no devices or adjustments appropriate to 
the problem. If credit organizations cease to perform their 
functions and attempt to shoulder the burden off upon other 
lines of business, these others must in their turn cease to 
perform their appropriate functions, simply because they can- 
not perform both their own functions and those of the banks. 

Control of panic. — The foregoing is, however, merely an- 
other way of enforcing the established doctrine that, in times 
of especial credit pressure, it is the business of the banks to be 
especially liberal of credit. If, then, the hard and fast re- 
serve limitation interferes, it should forthwith be repealed ; 
if to fulfill their responsibilities the banks must somehow get 
together for joint action, they should be authorized — or 
compelled — to undertake the necessary organization ; if 
the custom of depositing reserves with other banks works out, 
in fair weather, as a stimulus to speculative activity in reserve 
centers, and, in bad weather, results in an automatic cancella- 
tion of reserve resources, this double or triple counting of 
reserves should be promptly outlawed. By one device or 
another the banks should be held to the responsibilities of 
their function — the supplying at all times, and especially 
in times of stress, of all that credit in guarantee of which any 
applicant is able to offer the adequate security and for which 
he stands ready to pay the ruling rates of interest. 

Post-Panic Depression. 

Rising prices and dividends, — Rising prices upon con- 
sumption goods during the period of easy and expanding 
credit must be attended by rising prices upon the equipment 



296 



THE ECONOMICS OF ENTERPRISE 



goods and upon the raw materials and the labor entering 
into the consumable products. But precisely because these 
higher prices for the intermediate goods are derived from the 
higher prices of their products, the rise in the price of the 
intermediate good follows more or less belatedly after the 
rise in the consumption goods. The years of easy and 
expanding credit are, therefore, years of wide margins of 
gain to enterprise — years when the employers obtain 
some indemnity for the long drag of the preceding de- 
pression. The period is, therefore, a time of high dividends 
upon corporate stocks, and therewith of advancing market 
prices for these stocks. And as the prices of the stocks go 
higher with the higher dividends, more liberal loans can be 
made against the stocks as collateral. Thus, the larger 
credits granted and the larger deposit liabilities of the banks 
make possible still higher general prices. And these higher 
prices make possible, in turn, still higher levels of dividends 
and of derived market prices on the stocks.^ 

^ Starting with the lowest quotations of raikoad stocks in 1896, 
and selecting the highest market records of each later year in suc- 
cession, the following quotations are offered in illustration of the 
movement under analysis : 





Atch. 


St. Paul 


III. 
Cent. 


Mo. Pac. 


N.Y. 
Cent. 


U. P. 


C.& N.W. 


1896 


8 


59 


84 


15 


80 


3 


85 


1897 


17 


102 


110 


40 


115 


27 


132 


1898 


19 


120 


115 


46 


124 


44 


143 


1899 


24 


136 


122 


52 


144 


51 


166 


1900 


48 


148 


133 


49 


145 


81 


172 


1901 


91 


146 


154 


124 


174 


133 


215 


1902 


95 


198 


173 


125 


168 


113 


271 


1903 


89 


183 


151 


115 


156 


104 


224 


1904 


89 


177 


159 


111 


145 


117 


214 


1905 


93 


187 


183 


110 


168 


151 


249 


1906 


110 


199 


184 


106 


156 


195 


240 


1907 


108 


157 


172 


92 


134 


183 


205 


1908 


101 


152 


149 


67 


126 


184 


185 


1909 


125 


165 


162 


77 


147 


219 


198 


1910 


124 


158 


147 


73 


128 


204 


182 


1911 


116 


133 


147 


63 


115 


192 


150 


1912 


112 


114 


141 


47 


121 


176 


145 



MONEY, CREDIT, AND BANKING 297 

The further process. — And not merely this : but the same 
cumulative interaction between the extension of credit and 
the rising prices of goods and securities manifests itself in a 
still more direct way. We have already noted that borrow- 
ing is largely done in order to finance production, and that 
the expected selling price of the product not only motivates 
the disposition of the entrepreneur to borrow, but fixes the 
limit to which the lender is disposed to go in the extension of 
credit. Thus falling prices discourage both borrowers and 
lenders. So, rising prices increase both the ability to borrow 
and the disposition of banks to lend. The loans granted, 
with the deposit credits derivative from them, again raise the 
prices, and so on, seemingly without end. 

Then narrowing margins. — But there comes an end ; and 
the influences which bring it are of two sorts : (1) The banks 
experience increasing difficulty in maintaining reserves ade- 
quate to their expanding liability. With higher prices in 
general, requirements for pocket money and for the cash 
transactions of everyday business are increasing. Not only, 
then, are the reserves of the banks falling relatively to the 
liabilities, but these reserves are likely even to be falling 
absolutely. (2) With the restricted power of the banks to 
expand their credit circulation, there goes also a less rapid 
expansion in the demand for credit. Not only are the prices 
of products rising less rapidly, or even are remaining station- 
ary, but the prices of raw materials, and especially the wages 
of labor, are approaching nearer to a level corresponding to 
the prices of the finished products. Thus, the margins of 
gain are narrowing, and dividends upon stocks are becoming 
less generous. With these falling dividends, the market 
prices of the securities are also falling and their availability as 
collateral for credit is shrinking. (Observe the general trend in 
the prices of railroad stocks since 1905-1906. Note, p. 296.) 



The foregoing discussion is to our immediate purpose as 
throwing light on the movements of prices in times of 
financial reverse. What is there in the long drag which 



298 THE ECONOMICS OF ENTERPRISE 

follows the crisis to paralyze the processes of production? 
For ultimately it is not the credit, or the margins, or the 
prices which are of concern to the general well-being, but only 
the volume of products for consumption. 

We have already seen that the first effect of the abdication by the 
banks of their function of credit issue is not primarily to occasion a 
restriction of the aggregate of business credit, but only a restriction 
on the banking level; there is really an expansion, enforced but 
real, on the wholesale and distributing level. But the limits to which 
this sort of expansion can go are rigid. If the manufacturers and 
wholesalers can continue to sell only through constant extensions of 
credit, selling must shortly cease. So with the retailer in his rela- 
tion to his customers. And the customers, in turn, if they must buy 
for cash, are restricted in their buying. It is thus evident that 
while the producers' ability to maintain production is suffering, the 
demand for goods is also suffering. The aggregate product of society 
is diminishing. But it is not quite clear upon which side, the supply 
or the demand, the causation is in the main to be located. All that 
can safely be said is that the denial of credit by credit institutions 
— the shifting of the burden to shoulders inapt to bear it — is 
interfering both with production and with consumption. The net 
result is a smaller total of product in society. The crisis itself has 
some very prompt effects upon production. 

But a longer-time view discloses another and a still stronger 
influence making for a restriction of production. We enter 
upon the problem of depressions. 

The unequal fall in prices. — The business of the entrepre- 
neur is to make profits. He has no concern with social 
welfare. He faces the following problem : In the fall of 
prices after a panic not all commodities fall with equal 
rapidity. Goods from foreign sources, for example, may 
nearly or quite hold their old level of prices. Other products 
are perhaps produced under conditions more or less approach- 
ing monopoly ; others again may be well sustained in price, 
through speculative holdings by the producers or through 
restrictions of product. The entrepreneur must produce in 
view of market prices. Prices are his master. If his produc- 
tive outlays are too high, he must withdraw from business. 
There is, however, for most employers one resource and one 



MONEY, CREDIT, AND BANKING 299 

only — that of reducing wages. A small reduction may per- 
haps be sufficient. But here is precisely the kernel of the 
difficulty. Even were raw materials for all industries falling 
regularly and equally, the entrepreneur would still be com- 
pelled by lower prices of product to reduce the wages paid. 
As a practical fact, this is a difficult matter. Laborers resist 
angrily and persistently. They do not understand the neces- 
sity of the reduction — they believe that they have merely to 
stand firm. To prevent a strike or a long continuance of 
strained relations, the employer often finds it not less profit- 
able, and much more comfortable, to close his shop. In 
times of depression margins are scant enough at the best. 

Inertia is a fact which must be reckoned with. Wages 
rise slowly and, when fall is inevitable, fall slowly and with 
painful struggle. Public opinion concurs with difficulties in 
business to impel the factory owner to quit the contest. 
Competition among wage seekers does not protect him. If 
the industry requires skilled labor, he cannot readily re-man 
his factory — the unemployed, even, are loath to present 
themselves for the vacant places. Ostracism is visited upon 
them if they do, and they are even prevented by force. 

The frictions of readjustment. — Were it possible for prices 
to fall evenly all along the line, the depression following upon 
panic would be less important and of shorter duration. But 
(1) as long as indebtedness does not fall as measured in money 
units, there is tremendous resistance — in many cases a 
struggle for very financial existence — against sale and 
liquidation at the ruling level of prices. Even were this 
difficulty avoided, as will be shown to be possible, there 
would still remain (2) the difficulty of accurately ad- 
justing wage payments to market prices. Capital, labor, 
and employer must cooperate in production. If from 
their employer laborers insist upon all, or more than all, 
of the product, production must suffer. The marginal 
principle applies here in an important manner. Those 
employers hardest pushed by the demands of employees, 
or those least able or least disposed to continue production on 
narrow margins, close the doors of their factories. 

This analysis points to large advantages in the commodity 



300 THE ECONOMICS OF ENTERPRISE 

standard of payments, especially as applied to attempts to fix 
upon a basis of agreement between employers and employees. 

Post-panic depression and under-consumption. — But 
will the same lines of explanation serve also for the industrial 
situation in the post-panic period, prolonged as it is in some 
cases to the better part of a decade? The processes and the 
causes immediately following upon the crisis time are fairly 
clear. But depressions are mostly unknown land. 

The main issue, however, in the depression problem is 
easily formulated : Is the depression to be interpreted in 
terms (1) of disturbed production reacting upon consump- 
tion, or rather (2) of disturbed consumption reacting upon 
production ? 

That production has been seriously thrown out of gear by 
the crisis requires no further emphasis ; but that things are so 
wearily slow in recovering is our present problem. Crises 
are one thing, depressions another. After the crisis there 
follows a long period of idle and surplus resources and 
equipment. Prices are low. Yet the bankers have plenty of 
money for loan and plenty of reserves for the extension of 
credit accommodations. Credit is, indeed, abnormally easy 
for any one whose security is acceptable, the only difficulty 
being that the few who can get the credit do not want it, and 
that the few who want it cannot get it. Interest rates are 
low upon such loans as are made. 

Easy credit, falling prices, diminishing consumption. — 
Why, with all this plenitude of money, and with these 
ample reserves for credit, are prices also so low? Is the 
explanation in overproduction? But the economists deny 
that overproduction is a possibility. Is it discouraged pro- 
duction lasting over from the panic — insolvent businesses, 
plants either under foreclosure or closed for lack of prospects 
of gain? Why, with so many competitors crippled, is there 
this bad outlook for such of the producers as have weathered 
the storm ? Wages surely have fallen low enough ; the wage 
earners are frantic in their search for employment, are starv- 
ing, will work for anything they can get. Raw materials 
were never so cheap. Why do not things move ? 



MONEY, CREDIT, AND BANKING 301 

Can it really be true that there is no market for the prod- 
ucts ? The rural laborer is wanting work and the city dweller 
is wanting food, and both are wanting clothes. And still 
there is no work. And in face of all this dire want, there are 
still people to talk of overproduction or of underconsump- 
tion. How can there be overproduction? or underconsump- 
tion — which looks like an evasive and timid way of saying 
the same thing ? How can goods in general be in oversupply 
so long as the desires of men are still unsatisfied — are, in- 
deed, farther than ever from satisfaction ? 

Can there be overproduction? — The classical argument 
against the possibility of general overproduction — of a 
general glut — appears on the face of it to be conclusive. 
Supply and demand are merely different ways of regarding 
the total of products : each man's products are a demand for 
other men's products. To increase the general supply of 
goods is, then, to increase the general demand for goods. 
True, these goods are exchanging one against another through 
money as the intermediate. But no matter ; suppose that 
barter were the only exchange method : what could it 
mean to say that the supply of goods was greater than 
the demand for them? The more of each thing, the more 
of other things to exchange against it. True, some goods 
may be relatively overproduced ; but is it not clear that 
not all the goods can be relatively overproduced? So runs 
the argument. 

Money complicates the problem, — But, after all, the fact 
that there is a money intermediate has something to do with 
the problem. What must happen if the possessors of goods 
really do not want to barter these for other goods, but only to 
get hold of money and, for the time being, to stop there? 
What if for a while the intermediate is receiving a marked 
and extraordinary emphasis — is sought for substantively, 
rather than as intermediate — is held as provision against 
the pressure of creditors, or for the purpose of later speculative 
purchases, or for some other end remote enough so that the 
money has lost temporarily its function of serving as inter- 
mediate in the exchange of present products against other 
present products ? 



302 THE ECONOMICS OF ENTERPRISE 

Money as option of delay. — It is strange that the use of 
money as a " storehouse of value " should have escaped at- 
tention in this regard. The use of money as current inter- 
mediate shades off by insensible gradations into the use as 
deferred intermediate and into the use as intermediate in 
deferred payments. The classical argument is inadequate 
precisely because the intermediate commodity is present with 
its possibility of postponed outlay, and because all the 
phenomena of the deferred pajinent relation are present 
also. Goods have, in truth, to be conceived in another 
aspect than this solely of present goods against present 
goods; the case sometimes presents itself as one of present 
goods against future goods ; and for this purpose moneys and 
credits, as the form of quid-pro-quo into which existing goods 
are seeking exchange, may at one time be receiving a much 
more marked emphasis than at another time. When the 
exaggerated desirability of postponed consumption obtains, 
the demand for ordinary commodities slackens. The prob- 
lem then transforms itself into this — how shall men, in the 
average, increase their production and sale of goods con- 
sistently with a diminished buying and consuming of goods ? 
And not only is it true that in time of depression present 
goods are, in large part, likely to be offered only against 
money rather than against other goods ; but it is true, also, 
on the money side, that money itself is disappearing as a 
demand for existing present goods. Goods are offering 
against present money, while money is offering only against 
promises to pay in later goods or in later money with which 
presumably to command later goods. In large part, then, 
present goods are failing to exchange against present goods. 
The offers of present goods are not for present goods, and the 
offers of present money are not offers for present goods. 

Exaggerated emphasis upon the future. — Somewhere, 
then, in this neglected field may well be sought the solution 
of our problem. It is possible, surely, that present goods 
should fail to find a market, so far as these goods are merely a 
demand for money or for deferred purchasing power. There 
is implied no lack of human need or desire, but merely a 
situation in which foreseen future needs are outranking in the 



MONEY, CREDIT, AND BANKING 303 

present estimate the actual present needs. In a situation of 
this sort, present money, or well-secured promises of future 
money, may easily acquire an extraordinary command over 
present consumable goods. The traders willing to offer the 
present money, or able to offer the adequately secured 
promises of future payment, are not numerous. Falling 
prices necessarily result. 

A general fall in prices may not stimulate consumption. — 
Nor is it at all clear that these falling prices will avail to 
market the normal supply of goods or to terminate the glut 
on any other terms than of enforcing a greatly restricted pro- 
duction. If prices are falling — the exchange power of 
money over present goods rising — so also is rising its puta- 
tive future purchasing power. Rather is it true that for so 
long as the current psychological attitude prevails, there can 
be an adequate market for only those commodities minister- 
ing to the more primary of human needs. 

Under consumption actual. — The fact is that, in time of 
depression, the volume of the exchange medium offering 
against goods is a grievously restricted volume. The dis- 
position toward oversaving prevails. True, there is money 
enough ; no one has been tempted to destroy any part of the 
existing supply. But money which is in the cellar or in 
bank vaults is not circulating money. It is retired, with- 
drawn. For all current purposes, it might as well never have 
been mined, or have been sunk in the sea. Were it really 
functioning as bank reserves, it might be supporting several- 
fold its volume of circulating credit. But in no effective sense 
is it a part of reserves. It is altogether idle. 

When will it emerge from its hiding ? Much of it awaits in 
speculative watchfulness the time when things shall have 
" touched bottom," and will emerge at such time as other 
hoards appear ready also to emerge : when the rest are ready, 
all will be ready. Other of this retired purchasing power 
will some day come to realize that prices must finally turn 
toward rise — that the buying power of money over con- 
sumption goods has already reached its maximum, and that 
to invest in deferred payments is to submit to great and pur- 
poseless loss. Still other of the currency in hiding is awaiting 



304 THE ECONOMICS OF ENTERPRISE 

the return of a more genial temper toward the consumption 
of wealth — for a reinstatement of a standard of living com- 
mensurate with the productive powers at human disposal. 

It is, then, to be recognized that the period of depression is a 
period of a lowered standard of living, of a general conviction of 
being poor, of an exaggerated care for the future, of the starv- 
ing of present needs in oversolicitude for future requirements 
— a restriction of present consumption in the hope of minis- 
tering to a larger consumption in the future. 

But, taken in the average, this hope is doomed to disap- 
pointment. It is — when so widely held — sheer error and 
delusion. There is no one to sell to, no one to lend to. For 
how shall every one extend his production beyond his con- 
sumption, and sell his surplus to some one else ? 

Savings and investment. — But why may not investment 
solve the problem ? There is always a market for savings in 
prosperous years ; why should there not be a market now ? 
But prosperous years are a period of an extraordinarily high 
per capita productiveness of goods. All productive energies 
have been fully employed, enterprise functioning at the ex- 
treme of pressure. The demonstration of this is convincingly 
found in the prevailingly high level of consumption ; with 
every wage earner there goes the full dinner pail. Among the 
laborers there takes place a high average consumption of 
clothing, of minor comforts and of luxuries. Not only this, 
but the social production has been sufficiently large to permit, 
over and above immediate necessities, the acquisition of a 
great supply of durable consumption goods — more and bet- 
ter personal belongings, books, pictures, household furnish- 
ings. Meanwhile, also, in the more distinctly capitalistic 
field, the high social productiveness has made possible, 
through saving, the construction of miles and miles of new 
dwellings and of business blocks, new streets with grading, 
paving, and sewers, and generally the extension of all sorts 
of public improvement and the development of all sorts of 
quasi-public utilities. 

And how was it all possible? Doubtless the ultimate 
explanation must lie in the surpassing volume of production ; 



MONEY, CREDIT, AND BANKING 305^ 

but within this, and made possible by it, was the enormous 
volume of saving. 

Saving connotes lending. — But how, in the existing 
economic organization, does this saving take place ? Usually, 
as we have seen, through the restricted consumption of some 
individuals or classes of society, and the transfer of this saved 
purchasing power, this loan fund, to others, mostly or largely 
for the purposes of the creation of new equipment for pro- 
duction. It is, then, mainly the need of new railroads, new 
factories, new appliances, and new equipment, that has fur- 
nished the market for new savings and the possibility that 
these new savings should express themselves in an increasing 
volume of productive equipment. But when the market will 
no longer absorb the product of the existing factories, there is 
no occasion to build more factories or to borrow for more 
equipment. When the railroads cannot employ their pres- 
ent rolling stock, they will not borrow to construct more. 
When the dividends are suffering, new lines of road will not be 
built. The market for savings has disappeared. Business 
men and corporations are not extending their operations. 
There are already more goods than can be sold, more houses 
than can be rented, more public improvements than the tax- 
payers are willing to pay taxes for. It is, then, evident that 
if savings will not capitalize into forms of intermediate social 
wealth, there can be no market outlet for the savings, unless 
it be in consumption loans, that is, in class indebtedness, 
dubiously secured, or in government wastes and government 
wars. 

The nature of depressions. — We are, then, within reach 
of our conclusions : with the restriction of the disposition to 
consume, there is neither the market to absorb the productive 
output of society, nor even the market to employ the existing 
productive equipment. Capitalization cannot take place. 
Savings, in any considerable volume, become an impossi- 
bility because of no market for them ; there is nothing for the 
case but a sharp restriction of the productive output of society. 
A temporary lowering in the general standard of living takes 
place. Meanwhile some tendency is manifest toward the 
displacement of labor through competing surplus-capital 



306 THE ECONOMICS OF ENTERPRISE 

equipment, to the extent, that is, that the existing supplies of 
instrumental goods are adapted to serve, in relation to labor, 
rather as substitutionary than as complementary goods. 
In large part, however, it is true that the existing capital 
goods are rather complementary than substitutionary in their 
technological relation to labor, and that thereby labor re- 
ceives employment so far as the capital itself is able to find 
employment. 

Saving, Luxury, Charity, Waste. 

But this analysis brings us in presence of one of the most 
perplexing of economic problems ; how far is saving good in society 
anyway? Is there not truth in the popular notion that the 
receivers of income must for the general welfare spend — that 
money must be kept in circulation? 

There can surely be no question that savings may go into direc- 
tions of private capitalization that are injurious to society in the 
aggregate. The easy assumption that private capital means 
always social service, is silly optimism. If the result is merely one 
more monopoly, or another Celery Compound factory, or more 
gambling dens, or a merger of brothels, or a " slush fund " for police 
demoralization, or an investment in favoring legislation — society 
could clearly have got on better without the saving. 

But the fact of unsocial capitalization does not present the serious 
theoretical problem : Is all saving well, even upon the assumption 
that all of it be saving which adds to the aggregate social equipment ? 

It is unquestionably possible for the individual to make the mis- 
take of dying too rich ; he might better have lived more richly. 
There is small wisdom in the hoarding of supplies of nuts until one 
has no teeth with which to crack them. Youth is the time when de- 
sires are keen and goods are rich in service. Nor is wise individual 
provision against old-age penury certain to be limited at a wise 
social aggregate of saving. No doubt there are dangers of untimely 
death against which individual saving needs provide, as there are 
also dangers of death too long delayed, against which provision must 
be accumulated. 

Note, however, that the individual who endeavors to provide 
against the needs of old age — of Uving, say, beyond seventy years 
— must recognize the possibility of twenty-seven years of further 
living. But were 100 men to pool their issues in this regard, achiev- 
ing the benefit of the principle of the general average, there would 



MONEY, CREDIT, AND BANKING 307 

be need of provision for only seven years. Nor can any one man 
know that he is or is not to reach the age of seventy. Acting inde- 
pendently, he must make full provision for the full possibility of 
life. But out of 100 men thirty-five years of age less than one half 
will reach the age of seventy. A pooling of issues here would further 
reduce the volume of saving by more than 50 per cent. 

If, then, individual saving is to be justified in its social aspects, 
it must be by the fact that savings are directed to the increasing of 
social equipment, and that there are room and need for the expand- 
ing supply. 

How great an increase in equipment can a given total of labor ab- 
sorb? The substitution of instrumental goods for labor is, as we 
have seen, a limited process. But how far can improvement in 
quality and efficiency and expensiveness of equipment go ? No one 
knows. The degree is mostly a question of the development of in- 
dustrial technique. After the uncivilized man has provided himself 
with one or two boats and a fair supply of poles and lines, he will 
do ill to increase his supply in these directions. So, for the more 
skilled workman, there is a limit to the number of shovels, plows, 
reapers, or looms that he can adequately use or tend. So also the 
point of capital saturation is, in any society, in considerable meas- 
ure a question of the standard of comfort, and of the development 
of varied directions of consumption; but in any given situation 
there is a limit. Again, while in a collectivist society, hazards of 
criminal predation would be inconsiderable, other hazards of loss 
with passing time would need to be considered — dangers of fire, 
and of water, and of wind, and of decay. In an environment earth- 
shaking, like that of Japan, the same rational preference as with the 
Japanese would exist for one-storied unsubstantial architecture. 
And, finally, the law of diminishing utility with expanding supply 
would have its application. 

But assuming, as under present conditions we probably safely 
may, that there is still room in general for the indefinite addition 
of equipment goods, and assuming, also, — as we less confidently 
may, — that the saving in question will be invested in social 
equipment, we have still to seek the fundamental principle in the 
case. 

Further productive equipment is worth while only as a means for 
increased production. And further production is worth while only 
as a means to increased consumption. A larger productiveness in 
order to be able to save more, in order then to have a still larger 
product out of which in turn to save still more, is a circuity of 



308 THE ECONOMICS OF ENTERPRISE 

nonsense. Somewhen and somewhere there must arrive an in- 
crease in consumption, else the saving and the capitalization are 
purposeless, fruitless, and senseless. The point at which saving 
should stop is the point at which the present product, in view of 
present need, rationally outranks future product for future need. 
The expansion of product is, then, justified by and limited by 
the expansion of the disposition to consumption. The standard of 
consumption must keep pace with the power of production, or there 
is no advantage in the increased power. 

But the question whether standards of consumption do commonly 
keep pace with productive power so that, commonly, no surplus pro- 
ductive equipment comes to exist, and the question whether stand- 
ards of consumption must commonly thus keep pace, are distinct 
and separate questions. To the present writer it appears to be true 
that, excepting in times of post-crisis depression, the standards of 
consumption do now, in most modern societies, manifest the req- 
uisite power of expansion, but that there is no theoretical necessity for 
this ; and it appears equally clear that in post-panic times there is a 
distinct and disastrous restriction of consumption, with the result 
(1) that much equipment is temporarily a surplus, and (2) that in 
some measure there takes place in industrial processes a displace- 
ment of labor by capital goods. 

And it appears to be true that the very fact that, through develop- 
ing technique and increasing equipment, a high per-capita produc- 
tivity obtains, with a large margin of average individual income 
over imperative individual need, explains how it may occur and does 
often occur that the volume of consumption varies, and that, through 
sharp restriction of consumption, industry'- is subjected to the pe- 
riodic reverses and to the periodic wastes, insolvencies, and starva- 
tions which bad times connote. 

We seem, then, to have come safely thus far : that, from the 
social point of view, saving should neither go to the extent of sub- 
tracting from present consumption more in utihty than is added 
by the later increase of output, nor so far as to increase the later 
product to the extent that the later consuming disposition will not 
absorb it; the limits of rational savings are, then, set by the 
prospective elasticity of consumption. 

But now, precisely where, if anywhere, does this leave us with 
regard to the problem of luxurious consumption for those times when 
the general attitude is one of overabstinence, — of overemphasis, 
that is, upon future consumption as against present consumption? 

If in prosperous times the consumption of the rich displaces, 



MONEY, CREDIT, AND BANKING 309 

in the main, only their own later consumption, it must be still 
clearer that any expansion of consumption in times of depression 
cannot be at the expense of the consumption of others . And obviously, 
if the luxury of the rich employs productive energies that other- 
wise would not function, such harm, if any, as can result to others 
must be found in the direction of influences peculiar not to luxurious, 
but to ostentatious consumption — that is to say, not in the direction 
of any influence to restrict the absolute size of the incomes of others, 
but only the significance of those incomes. And if, in times like 
these, charity would be in any aspect justifiable, these luxurious 
expenditures have some obvious advantages over charity. 

But what in such case are the economic effects of charity? 

People who can find no work to do live somehow out of the actual 
product of industry, whether by the using-up of their own saved 
purchasing power, or by charity, or by loan. If we may assume 
that, through offered charity, their consumption is increased, and 
yet not at the expense of the consumption of others, but only with 
the result that more goods have been caused to be produced, it 
would appear to be true that the charity has meant added consump- 
tion for the recipients and added employment for others; and if, 
with their larger income, these others should be minded to increase 
their present rate of consumption, this industrial stimulus would be 
passed forward one degree. 

The case would, then, stand as follows : by means of the sub- 
stituted consumption of the recipients, the donors' existing claims 
against the products of others have been collected in the present and 
canceled, instead of being postponed for collection and cancellation 
to the future ; and the collection has taken place at a time when 
society has been able to achieve the cancellation through the em- 
ployment of productive energies that otherwise would have gone to 
waste. 

This argument, if valid — which is doubtful enough — means 
much for the methods and the times of the carrying forward of 
public work. But even without the support of this particular argu- 
ment, it should be fairly obvious that public improvements ought 
to be undertaken in times only of slack employment, and ought to 
be paid for in times of prosperity, rather than, as in present practice, 
carried on in prosperous times and on terms of displaced production, 
and paid for in time of depression. 

But what does the argument imply for the social advantage of 
such saving as does not express itself in the increase of the productive 



310 THE ECONOMICS OF ENTERPRISE 

equipment of society, but instead, flows into consumption loans or 
goes to finance fiscal deficits? Here nothing but condemnation is 
possible. Any private investment which, for any considerable 
period of time, takes toll from social product .by other title than of 
equivalent addition to that product is a socially disastrous thing. 
No matter what personal or moral justification there may seem to 
be, and as between man and man may really be, the case is, in last 
analysis, nothing but serfdom on the one side, and parasitism on 
the other. 

The Quantity Theory of Money. 

The quantity theory of money values — the theory that 
asserts that the general level of the exchange powers of money 
depends upon the quantity of it, or that changes in the quantity 
of it must bring proportional changes in general prices — 
would apply especially ill — were any one disposed to apply 
it — to the early history of any commodity, e.g., gold, as money, 
and in the time of the very beginning of the slow and gradual 
process of selective emphasis. The quantity of gold must then, as 
now, have had some bearing on its exchange relations, its values. 
In this sense the quantity theory has no deniers. So, also, has the 
quantity of iron, or tea, or wheat, or bread, or cotton cloth, some 
bearing on the market values. There is nothing in this fact peculiar 
to money. But the quantity, say of gold, in use as money at that 
very early time could have had httle bearing on its values at that 
time. There was no occasion for one value theory for gold and 
another for corn or cattle. 

It is quite certain, also, that the present extended emplojonent of 
gold as money (taking gold as a typical money and assuming it for 
the time being as the sole medium of exchange) must have a great 
influence upon the present exchange values of gold. 

So far, then, the theory of price when gold is money does not ap- 
pear to diverge from the theory of the price of gold bulUon when 
gold is not used as money. Every widening of the field of use for any 
good affects the demand for it and the exchange relations of it to 
other goods. So far the quantity theory of the purchasing 
powers of money can arouse, and has in the past aroused, no 
opposition. Gold as money is a commodity among other com- 
modities. If, then, there is force in the quantity theory of money, 
it must be true that the use of a commodity as money sub- 
jects that commodity to influences so peculiar as clearly to distin- 
guish it from other and ordinary commodities. Is gold, as the 



MONEY, CREDIT, AND BANKING 311 

money commodity, more than a mere commodity, differing, be- 
cause it is monej^, from gold or any other commodity employed 
exclusively in non-monetary uses ? 

But what, so far as at present carried, has the analysis to say for 
the merits of the quantity theory of money? The critics of the 
theory place their main emphasis upon two objections : (1) that 
goods do not and cannot, as mere goods — as pounds or yards or 
bushels of commodity — function as demand for money ; it is only 
as a good at a price that any commodity requires money for its 
transfer. The quantity theory assumes, therefore, it is argued, that 
price relations are already established, as the basis on which it 
explains the prices — proceeds, that is to say, to explain price rela- 
tions upon the basis of assuming the very price relations that are to 
be explained. Karl Marx, for example, says : " The sphere of 
circulation has an opening through which gold . . . enters into it as 
a commodity with a given value : hence, when money enters on its 
function ... its value is alreadj^ determined." ^ 

And so Laughhn : " The difference in theory centers about the 
time and the manner of the evaluation process between goods and 
gold. . . . The evaluation goes on antecedent to the exchange 
operation, since the exchange cannot, philosophically or practically, 
take place until the rate of exchange has been settled." ^ 

But, in point of fact, the entire argument of the opponents of the 
quantity theory proceeds upon an assumption which may be ac- 
cepted for the purposes of the immediate issue — viz. that the ex- 
change relations of gold to other goods must be explained upon the 
same basis as the exchange relations of copper or of bananas to other 
goods. The foregoing criticism is, therefore, not well taken : under 
the present issue the problem of the quantity theorist is not to ex- 
plain how gold originally established* itseff in exchange relations 
with other goods, any more than to explain the early history of the 
price of copper or of bananas. His present task is to explain how a 
change in the present supply of money — gold being taken as the 
sole money — • must affect its exchange relations to all the other 
goods against which it exchanges. He needs to establish merely 
that if there be, for example, twice as much gold money in the aggre- 
gate to be distributed among all these different exchanges of gold 
against goods, (1) the exchange relations will be modified, and (2) 
modified equally, and (3) that the fall in gold will be exactly one half, 

1 Marx, Capital, Morse and Aveling translation, Part I, Chap. 
Ill, p. 92. 

^ J. L. Laughlin, Principles of Money, p. 362. 



312 THE ECONOMICS OF ENTERPRISE 

i.e., prices will double. Neither for the quantity theorist nor for any- 
one else is discussion possible of the effects of changed conditions 
upon prices unless upon the assumption of prices to begin with. 
The effect of more money upon the prices of copper or of hats — and 
some effect is not denied — assumes existing prices for the copper or 
the hats. Still other prices, indeed, have also to be assumed. 
How much money will be offered at any time for copper must de- 
pend in large part upon how far money will go in the buying of other 
things. Most price theory is, in fact, as we have seen, merely a 
schematic severing of the supply of one commodity, and of the money 
demand for it, from the prices of other commodities. Thus the 
entire demand and supply analysis for any commodity will go to 
pieces under the Spartan requirements of critics like these. And 
even were all price investigation to become historical, it must begin 
somewhere ; and each step of it must take a given price situation as 
its starting point. The process will present itself as a long series of 
small incremental changes. But this is precisely the method of the 
analysis under criticism by Laughlin — a method which both the 
advocates and the assailants of the quantity theory are none the less 
compelled to accept; always the problem is to trace out, in a 
given situation, the changes in some things that will have to attend 
certain changes in other things. 

But take the difficulty at its worst : Suppose that on either side of 
the river there are goods imperatively calling for transfer to the 
other side for exchange against goods there, and that there are only 
a fixed number of boats with which to do the transporting — just 
boats, not valuable boats : Will they not take on value ? And if 
the carrying power of the boats is dependent upon the degree of 
exchange power that they take on, will they not, through the pres- 
sure of the competitive bidding for them, take on just the degrees of 
exchange power in all their different exchange relations that wUl 
enable them to do the imperatively necessary thing? 

The second point of attack presents more serious difficulties for 
the quantity theory as it is commonly formulated. When gold had 
not yet come to be specialized to the money function, the supply of it 
had clearly something to do with the values of it. And so now the 
quantity of any ordinary commodity has something to do with the 
values of that commodity now. Likewise the quantity of gold as at 
present employed must have something to do with the present 
exchange relations of gold. All this the critics of the quantity theory 
freely admit, as indeed they are bound to do, since it is their funda- 
mental doctrine — albeit an incorrect doctrine — that gold, whether 



MONEY, CREDIT, AND BANKING 313 

used as money or not, is a commodity whose exchange relations are 
to be fully explained under the principles valid for commodities in 
general. Thus, this second objection denies that goods exchange in 
one great total and aggregate against money — gold — as a total and 
an aggregate, any more than goods in general exchange against copper 
or wheat or iron as an aggregate. No such great exchange of money 
for goods — these critics assert — ever takes place, but only an in- 
definite number of separate exchanges, gold here against copper, 
there against wheat, and so on indefinitely. Each of these exchanges 
is a separate transaction arrived at as a separate adjustment of gold 
to the particular commodity in question. To conceive of the pro- 
cess as one great exchange of commodities for money is a social- 
organism interpretation of the facts, or some other fabulous mis- 
interpretation. The general level of prices — the argument runs — 
is merely a way of summarizing or of averaging the results of all these 
different and separate adjustments. Thus Marx, having again 
denounced " the absurd hypothesis that commodities are without a 
price and money gold without a value when they first enter into 
circulation," proceeds to deny " that once in the circulation, an 
aUquot part of the medley of commodities is exchanged for an 
aliquot part of the heap of precious metals. . . . How use values 
which are incommensurable with regard to each other are to be 
exchanged, en masse, for the total sum of gold and silver in a society, 
is quite incomprehensible." ^ 

And so Laughhn : 

" The principles which fundamentally govern price . . . avoid all 
necessity of comparing the money work with the media by which 
that work is necessarily accomplished." ^ 

" A general level of prices is nothing, but an average made up of 
the actual quotations of single articles." ^ 

"Are farmers . . . really influenced in fixing the prices of eggs in 
gold by any other considerations than the amount of money work 
and the total media of exchange? " * 

"A general demand for goods arising from the side of money . , . 
is only a phantom demand, a figment of the imagination. ... X is 
exchanged for money; then the money is given for Y. The real 
exchange is of X for Y." ^ 

" A change in the value of gold ... is itself a change in price. 
It seems quite unnecessary, then, to go through a subsequent process 

1 Marx, Capital, Morse and Aveling translation, p. 99. 

2 LaugMin, Principles of Money, p. 229. 

3 Ibid., p. 316. " Ibid., p. 316. » jj^^^^ p, 324. 



314 THE ECONOMICS OF ENTERPRISE 

of comparing the media of exchange with the mass of transactions 
in order to procure a change of prices or to find the cause." ^ 

" No average of the prices of a number of commodities can be 
derived in any other way than by combining the actual quotations of. 
single commodities. . . . The general price level could not have 
been arrived at by a comparison of all the money work with all the 
media of exchange. . . . We must seek the forces affecting the 
general price level of goods among those already analyzed as operat- 
ing on particular prices." ^ 

" The quantity of gold has . . . affected prices only through its 
influence on the value of the standard of prices, and not through its 
actual presentation as a medium of exchange against goods." ^ 

No answer is possible to this criticism ; it is undeniable, con- 
clusive, even axiomatic. If the doctrine under attack is the quan- 
tity theory at its best — if this is a fair interpretation of its essential 
position, as it is a fair interpretation of most that has been written 
in its advocacy — there is nothing to do but to abandon the theory. 

The fact is, however, that the theory does not rightly rest upon the 
assumption that there is one great exchange transaction in which all 
the exchange relations of the various different goods to money are 
fixed; the general price situation is unquestionably nothing more 
than " an average made up of the separate quotations of different 
articles." Nor can this level be modified otherwise than through 
modifying the terms of the separate exchange relations between 
money and goods. 

Thus either or both of the foregoing arguments against the 
quantity theory may be freely accepted without the slightest injury 
to the theory in any careful formulation. Prices must move up- 
ward with an increased supply of money, as mere intermediate, 
offered for goods. These prices are indissolubly connected and are 
equally affected by the change in the supply of the offered money. 
The change in the offered supply will make a precisely corresponding 
change in the prices of the goods against which the supply is offered. 

We have already seen that most of the fluctuations in prices are 
due to changes in the credit situation. The commercial crisis is a 
collapse of credit. The low prices of the post-panic depression are 
due either to the terror or to the industrial havoc wrought by the 
collapse. Rising prices are commonly due more to expanding credit 
than to expanding supplies of money. How, then, can the quantity 
theorist account for credit in his formulations? Either (1) he must 
resort to the heroic abstraction of conceiving credit as a constant 

1 LaughUn, op. cit., p. 342. 2 Ibid., pp. 352-3. ^ Ibid., p. 362. 



MONEY, CREDIT, AND BANKING 315 

relative to money, of treating it as one of the " other things assumed 
to be equal," or (2) he must reformulate his doctrine so as to assert 
that prices are proportional to the quantity of exchange media 
offered against commodities. Course (1) is certainly open to him, 
leaving over, however, the necessity of taking full account of the 
disturbances attending the fact that credit is one of the various 
things that actually never remain equal. Only in a long time and 
general average is it safe to assert that credit, as built upon money 
reserves, holds a fairly constant relation to the volume of money. 
To regard credit as a constant is doubtless necessary for certain pur- 
poses, since only by the method of logical isolation is the independent 
significance of the money changes to be analyzed. But inasmuch as 
the long-time and gradual changes in prices are of small practical 
importance, while the short-time disturbances and fluctuations are 
of paramount seriousness, the method of isolation can directly 
interest only the devotee of theoretical long-time analyses. (2) It 
is equally open to the quantity theorist to conceive of credit as 
currency, and to present the level of prices of any one time as deter- 
mined by the supply of currency offered for the various goods respec- 
tively, as over against the respective supplies of goods. The differ- 
ent exchange relations must still be separately established between 
goods and gold, it being true merely that the use of credit in place of 
gold must greatly affect the exchange values of gold. In those 
exchanges in which gold is not actually used, a substitute, payable in 
gold or valued in gold, is the quid-pro-quo in the exchange. Thus 
gold becomes so much the more plenty for the remaining exchanges 
in which it is actually used, and the values of it and of all the substi- 
tutes interchangeable with it come to be fixed in those transactions in 
which gold is the actual medium. Thus it need not greatly matter 
to the view under consideration whether credit be conceived as 
adding to the total supply of media or as diminishing the volume of 
transactions calling for the use of the actual gold and functioning 
therefore as demand for it in its service as medium. In either of 
these views, however, the necessity or reserves must be considered. 
Credit, as an addition to the total supply of media, must stand as 
merely a balance between the total credit and the reserves necessary 
in support of it. Or if credit be viewed as an economy of money, 
allowance must similarly be made for the amount of money required 
in the reserve function. 

Taking, then, the products to be exchanged as constant, and 
taking the volume of credit to be constant in its ratio to the volume 
of money on which it is based, the level of prices must be in direct 
ratio to the volume of money offered against goods. If, however, 



316 THE ECONOMICS OF ENTERPRISE 

credit is not conceived as a constant relatively to money, the level of 
prices must stand in direct ratio to the volume of money and of 
credit offered against goods. 

We conclude, then, that, as a long-time influence, an increased 
quantity of money must lower its exchange power — the exchange 
power of the standard — in its various exchange relations, not as an 
increase relative merely to the money use, but relative to its entire 
use as money and as commodity. Gold values are due on the demand 
side to both of these demands, and the total supply is distributed 
between these demands, precisely as is the total supply between the 
different countries, according to the relative strengths of the de- 
mands. The money demand, as an especially imperative and in- 
elastic demand, must absorb, as against the commodity demand, 
enough of the gold at any level of its exchange powers to mediate the 
volume of exchanges dependent upon it. It is merely a crude ren- 
dering of the quantity theory that " bases prices upon the quantity 
of the gold [money] actually passed from hand to hand as medium 
of exchange." ^ The exchange values of the money unit are not 
derived from the commodity market nor are they prescribed to the 
commodity market. Both demands concur in affecting the ex- 
change values of the commodity which is used for both purposes. 
So long as no barrier exists between the two uses, no item of gold 
can remain in use as money, if it has as bullion a higher exchange 
power in any other use than it has as money. The money use will, 
on the other hand, absorb every ounce of gold to which it can offer 
the better market. 

But there are certain phenomena of prices which the quantity 
theory — in any usual formulation — does not explain, and which 
the opponents of the theory cite insistently in refutation — the 
while themselves keeping safely distant from any attempt at ex- 
planation. 

No matter what the relation of expanding credit to prices pre- 
cisely is — and in this regard the divergences of doctrine are not 
serious — it is clear that the motives prompting both the application 
for credit and the granting of it are various. It is only at fairly 
distant intervals that the banks are seriously limited in their credit 
extensions by any shortage of reserves : and even at these times, the 
limitation is commonly due to the acute but temporary stringency 
attending the seasonal movement of crops or to the recurrent dates 
of heavy financial settlements. Loans, therefore, may, it is true, 

^ Laughlin, op. cit., p. 280. 



MONEY, CREDIT, AND BANKING 317 

be restricted by the inadequacy of reserves; but the fact is that 
they are not commonly so restricted. 

Why, then, with reserves to spare, do not the banks extend their 
credit activities? Not rarely because business men are not asking 
for the larger credit. Or, again, the banker may regard the direct 
risks as overgreat. Or, still again, he may hesitate because of un- 
known possibilities of reserve pressure or of disturbed credit in the 
future. Recalhng that new supphes of gold go mostly to the mints, 
and move thence to the banks as deposits, it must commonly be true 
that the new gold has no effect to influence the amount of credit in 
circulation, and no direct effect to change the amount of gold in cir- 
culation. Some effect in the latter regard it undoubtedly does have 

— but by methods for which the quantity theory makes no provision 

— methods, indeed, which are not easy to make consistent with it. 
At these times of plethoric reserves, the change in general prices is 
initiated in the non-monetary market for gold. With the greater 
supply of it both for money and for commodity uses, more of it is 
used for commodity purposes, at falling exchange ratios against 
other things. As gold falls in the commodity market, it has also to 
fall as money ; prices go up. With these higher prices and the larger 
need for a circulating medium, credits commonly expand, and at the 
same time some gold tends to leave the banks for cash exchanges. 
Thus, with some loss of gold from the bank holdings and with some 
increased need for gold to go with larger credits, the balance of idle 
reserves is narrowed ; the quantity of media is changed as a result — 
not as a cause — of the changed level of prices. 

There is, then, no fixed and regular ratio between the volume of 
gold in the aggregate and the volume of gold m circulation as money, 
either directly or as reserves for credit. Nor is there any uniformity 
of ratio between the volume of gold in the banks and the volume of 
credit reared upon it. It is, however, as we have seen, fair to regard 
these as short-time divergences from the norm. In the long run and 
in the broad average, the volume of credit depends on the volume of 
money — reflects it — shadows it. But it is in the very long run. 

This same short-run lack of correspondence is illustrated with 
even greater emphasis in the phenomena of crises and of post-crisis 
depression. It is, indeed, at this point that the critics of the 
quantity theory have made their final and impregnable stand — but 
only as a short-run appeal to the other things that are not equal. 

The crumbling of prices in time of panic is explained by the 
partisans of the quantity theory as a contraction of credit ; thus a 
contraction of the total of the circulating medium; and thus a 



318 THE ECONOMICS OF ENTERPRISE 

fall in prices. No difficulty is commonly felt with the fact that the 
prices of some things are falling with especial rapidity. Allowance 
is, however, now and then made for the increased demand centering 
upon what is left of the circulating medium by reason of old credit 
relations that are now pushing for liquidation. 

But the difficulty with the explanation is that it only partially 
explains. Not only this, but the facts are perhaps more easily 
fitted into the contrasted emphasis, viz. that money in each of its 
exchange relations is coming to buy more goods — goods to buy 
less money. 

The truth is, however, that other and important causal forces are 
at work in time of panic. 

The tumbling of prices in the panic is in large part due to the fact 
that the holders either of money or of deposit credit will not buy 
with it. Physically the money is there — as quantity, as concrete 
thing ; psychologically, as purchasing power, it has vanished. So, 
also, the deposit credits exist, but they have ceased to exist as de- 
mand for products. They are merely hoarded, postponed purchas- 
ing power. As present circulating medium, as present demand for 
anything, they are not. 

Thus there are more goods being offered against currency — not all 
of them at once, truly, as one transaction — than are possible of 
sale at the immediately preceding level of prices. So prices fall. 
But there is more in the case than the mere scared or speculative 
retirement of the circulating medium. There is also an increase in 
the volume of commodities pressing for sale at the existing prices 
— many of them, indeed, for sale at practically any price 
above nothing. There is, in truth, not only less currency, but also 
more goods. A panic is equally a scared scramble to get gold — or 
things interchangeable with it — and a scared tenacity in holding 
it, — more generous offers of goods against it and higher refusal 
terms for it. 

There is, then, a change both in the demand disposition to offer 
goods for money and in the supply disposition to offer money for 
goods. Holders of goods fear financial pressure or a further fall 
in the prices of goods, and so push to sell : holders of money may be 
apprehensive of possible demands of creditors, or may be looking 
for further advantage as purchasers with further putting off of 
buying ; or they may have become convinced of the wisdom of a 
final withdrawal from all this up-and-down of things with its menace 
of loss, and so are waiting to lend out their funds in some safe and 
long-time placement — or are going to do some one or other unfixed 



MONEY, CREDIT, AND BANKING 319 

thing a year hence, when they shall have recovered from their fright . 
Temporarily, then, the emphasis is on currency, the intermediate of 
exchange, but not on currency as intermediate between present 
goods and present goods — not on currency as present purchasing 
power, but on currency as deferred purchasing power, on currency 
for future purchases rather than as demand for present goods. 
True, the quantity of money has not changed ; nor has the aggre- 
gate mass of goods become greater. But the offered currency is less 
and the offered goods are more. 

The truth is, then, that there are changes in price levels that are 
irrelevant to changes in the aggregate volume of goods produced, and 
irrelevant, also, to changes in the volume of money, and which are not 
to be accounted for by changes in the volume of credit available as 
purchasing power, but are solely explicable as changes in the attitude 
of the holders of goods toward purchasing power and of the holders of 
purchasing power toward goods. Times of panic involve the in- 
fluence of strong, though unusual, psychological movements, wherein 
the medium of exchange is itseK the subject of a new emphasis and 
of speculative activities. 

And the phenomena of the post-panic situation also, the lethargy 
and stagnation of the dull-time years, still further illustrate a 
psychology peculiar to monetary affairs — a psychology to which 
the quantity theory affords no key. The bear movement in goods 
continues and may even be emphasized. The prevailing disposition 
is to get hold of suspended purchasing power and to keep hold of it. 
Despite an increasing plethora of reserves in the banks, and despite 
falling rates of interest for those borrowers whose credit is good 
enough to enable them to borrow at all, prices remain low. The 
diminished volume of exchanges and the generous reserves are to- 
gether inadequate to bring about an upward movement in prices, or 
appreciably to stimulate purchases at the prevailing low general 
prices. It remains difficult to find a market for products, simply 
because each producer is attempting a feat which must in the aver- 
age be an impossibility — • the selling of goods to others without a 
corresponding buying from others. Goods refuse to exchange 
through money against goods, but only against money, as the pur- 
chasing power with which to control future goods when the pur- 
chasing disposition shall reestablish itself. In other words, the 
prevailing emphasis is upon money, not as intermediate for present 
purposes, but as a commodity to be kept — regarding money not so 
much as an intermediate in trade as an end in itself, or, more accu- 
rately, not so much with reference to its chief function of mediating 



320 THE ECONOMICS OF ENTERPRISE 

exchanges of present goods as to its usually subordinate function of 
mediating exchanges between present goods and future goods. 
For all present purposes of exchange relations and of prices, the 
psychology of the time stresses not the goods to be exchanged 
through the intermediate commodity, but the commodity itself. 
The halfway house becomes a house of stopping. There sets in an 
abnormally developed emphasis upon money or credit as deferred 
purchasing power rather than as present purchasing power — on 
money for future purchases rather than as demand for present goods. 
Or to put the case in still another way : the situation is one of 
withdrawal of a large part of the money supply at the existing level 
of prices ; it is a change of the entire demand schedule of money 
against goods — offer prices and reservation prices both being in- 
cluded. If the terminology of the case is to be fitted — so far as 
may be — to the needs of the quantity-theory analysis, this dimin- 
ished disposition on the part of holders of money to let it go will have 
to be interpreted into a diminution in the supply of money. 

And a similar necessity will face the quantity theorist on the 
supply side of the market analysis : he will have to interpret an in- 
creased pressure on the part of holders of goods to sell them into a 
radical increase in the supply of goods. In any accurate statement, 
however, the truth of the case would run about as follows : In 
ordinary times, and with men in their ordinary minds, only a small 
part of the goods that they have are for sale, or if for sale, are not 
for sale at what anybody would think of giving. The goods were 
bought to keep, because they were wanted as against anything else 
that the money was likely to buy. The very reasons that have 
motivated the buying of the goods in the market now prohibit 
their resale in the market. Thus it is true — in one way of stating 
it — that at the ordinary established level of prices only a small 
part of the total volume of goods is seeking exchange through the 
intermediate. The rest of the goods have already distributed 
themselves into their permanent abiding places. There is no other 
place in which they so well belong as in the hands of the men who 
now have them. If they are to be rated as supply at all, — as surely 
in ultimate theory they ought, — they enter into the respective 
supply schedules at such high refusal or reservation prices as to have 
no slightest prospect of being sold. They are salable at a price, but 
find no takers at the price ; they are excluded supply. 

But with changing times men's minds change. Under stress of 
fright or under pressure of financial need, or at some speculative 
raid or speculative funk, there may come a radical scahng down of 
these reservation prices as well as of the offer prices. And especially 



MONEY, CREDIT, AND BANKING 321 

— and especially disastrously — in the period succeeding a panic, is 
there manifest a widespread and extreme solicitude for the needs of 
the future as against the present — a mania for collecting units 
of purchasing power for purposes of future use — rainy-day provi- 
sion run mad. 

What is the quantity theorist going to do with the necessity of 
fitting the short-time and especially significant perturbations of 
things into his long-time categories ? If he is to succeed in making 
his formulas fit the facts, it must be on terms of reconstructing his 
fundamental value categories, and therewith of reinterpreting some 
portion of his quantity-theory doctrine. The summons is, indeed, 
peremptory to do these things. Nor are they at all impossible of 
doing. 

Bimetallism. 

The world's stock of available gold for both monetary and 
non-monetary purposes is probably from ten to eleven billions 
of dollars. Something over one haK of this is absorbed by the 
money demand. If, indeed, the reserves of the great banking 
houses of Europe and the reserves of the numberless small banking 
houses scattered over the world are estimated and included, probably 
something upwards of 65 per cent of the available supply of gold is 
devoted to monetary uses. In the United States, accordimg to the 
government report of August 1, 1912, 47 per cent of a total circula- 
tion of 3277 millions of dollars, was gold either as coin or as gold 
certificates. The total of gold in monetary use in the United States, 
inclusive of the treasury holdings, was 1833 millions. 

That the purchasing power of gold would fall sharply, were gold 
demonetized the world over, cannot be open to question. Nor more 
is it to be questioned that the money use for gold has greatly con- 
tributed to the establishing of its present different purchasing powers. 

Equally unquestionable is it that the demonetization of gold by 
any one country would work its quota of fall, and that any new 
adoption of gold as money must contribute either to raise its pur- 
chasing powers or to mitigate a fall which would otherwise occur. 
This is not quantity-theory doctrine, but monetary doctrine at 
large. 

Not less certain is it that the series of silver demonetizations from 
1870 down to the present time have contributed to the fall of silver 
in terms of gold and to the falling powers of exchange of silver in 
terms of other things. And, finally, it is equally clear that any 
partial remonetization of silver would affect its market position 



322 THE ECONOMICS OF ENTERPRISE 

favorably, and that its general remonetization would sharply raise 
its commodity values, and still more sharply its exchange power 
relative to gold. The especially marked effect upon the exchange 
power relative to gold would be due to the fact that the remone- 
tization of silver would in itself amount to some degree of demone- 
tization of gold. 

The foregoing is, in broad lines, an account of what is known as the 
" compensatory action " between gold and silver, when both are 
freely coined at any fixed ratio — whether on the basis, say, that a 
silver dollar shall contain sixteen times as much weight of silver as 
the gold dollar contains of gold, the ratio of 16 to 1, or on the basis 
that the silver dollar contain twenty-five or thirty times the weight 
of the gold dollar, the ratio of 25 or 30 to 1. 

An ounce of silver is actually worth 3^^ of an ounce of gold. If 
the coinage ratio were made one to one, an ounce of silver coining 
into as much money as an ounce of gold, only silver would be coined. 
And if, on the other hand, the coinage ratio of silver to gold were 50 
to 1, no silver would be coined. The silver so coined would be worth 
only f f as much as coin as it was worth before coining. To coin 
it would be to stamp it as worth less than its actual bullion worth — 
to make 50 ounces of silver exchange against one ounce of gold when, 
in actual fact, 35 ounces of silver bullion are worth one ounce of gold 
bullion. No one could afford to coin anything but gold. 

If, however, the ratio selected were not widely divergent from the 
actual market ratio — say 36 to 1 — only a slight change in this 
market ratio would be necessary in order to bring silver into 
monetary use. Nor would the coinage of silver necessarily mean 
that the coinage of gold had stopped, but only that it were less rapid. 
Silver would be in some part — greater or less — usurping the place 
of gold in furnishing the bullion supplies for new coinage. But no 
great supply of silver would be available at the lately reached identity 
of the market ratio with the coinage ratio. It might be true merely 
that gold would be coined less than if silver were not coined at all. 
In any case, the total coinage of the two would be greater than if 
only one were coined. This slow and gradual coinage of silver 
would mean, therefore, some slight tendency toward rising prices 
— or prevention of fall — even though it might all the while be true 
that the reserves of the banks were generously ample. But note 
that the rise in prices must be very gradual — or the prevented fall 
be inconsiderable — not merely because the inflow of silver would 
be slight, but because, concurrently with this inflow of silver and its 
effect upon prices, the gold inflow must be in some degree checked, or 



MONEY, CREDIT, AND BANKING 323 

even an outflow set up, in response to the relatively increasing at- 
tractiveness of the outside market. 

It is clear that so far as gold were being set free by silver from the 
money use, this must be on terms of affecting adversely the pur- 
chasing powers of gold in the outside markets to which it flows. 
And so far as silver were being absorbed by the money use in place 
of gold, this must be on terms not only of affording to silver a wider 
market, but also of retarding the fall which must otherwise occur in 
the exchange powers of silver relatively both to commodities in 
general and to gold. Silver could come to be coined only when its 
exchange ratio against gold had so far fallen as to make its coinage 
possible. Its further coinage must tend to hold the market ratio at 
the level of the coinage ratio, not only by setting an end to the fall 
of silver relatively to gold, but also setting up a fall of gold — or of 
preventing a rise which would otherwise have taken place. 

In tendency the new coinage of silver is, then, (1) adverse to the 
purchasing powers of the money unit, (2) adverse to the purchas- 
ing powers of gold, (3) favorable to the purchasing powers of silver, 
(4) conservative of the exchange ratio of the metals at the coinage 
ratio : 

(1) The coinage of silver takes place at a net increase in the 
number of money units : Therefore the purchasing powers of the 
unit cannot be as high as if no silver were coined. 

(2) The money unit falling, and gold being still employed as 
money, gold must also fall both as bullion and as coin. It is, indeed, 
solely by virtue of this fall that larger supplies of it are available for 
commodity purposes. 

(3) The fall of silver relatively to gold which makes possible the 
coinage of silver is retarded by the new market which is opened up 
for it. 

(4) This retardation of the fall of silver occurs concurrently with 
an unfavorable influence upon the purchasing powers of gold. 
Thus the fall in the purchasing powers of the money unit takes 
place side by side with a tendency favorable to the values of silver 
and unfavorable to the values of gold. 

This same line of analysis would obviously hold were silver the 
original standard and gold the metal made available for new coinage. 
Nor is it necessarily true that the inflowing metal must bring about 
a fall in the purchasing powers of the unit; the effect might be 
merely to mitigate a tendency toward rise. The analysis is valid 
merely to establish the different directions of influence attendant 
upon the joint coinage of the two metals. 



324 THE ECONOMICS OF ENTERPRISE 

We are now prepared to examine the essential doctrine in the 
bimetaUic position; namely, that in view (1) of the retardation of 
the tendency of the new metal toward fall relatively to the previ- 
ously existing level of gold, (2) of the adverse influence upon the level 
of gold, (3) of the fact that the purchasing power of the money unit 
of either metal is unfavorably affected, and (4) of the fact that in the 
monetary use the two metals are equal and interchangeable and 
are moving in this monetary use concurrently in their level of pur- 
chasing powers, — the two metals must everywhere, in their ex- 
change ratios one to the other, maintain the ratio fixed for coinage 
purposes, so long as neither has been coined in sufficient quantities 
as entirely to displace the other from the money use. 

It is evident that if the free coinage of the two metals at the 
assumed ratio were attempted by any one country alone, some 
part of the displaced gold would flow abroad for foreign monetary 
uses, and some part be set free for the world commodity market. 
In such case gold would suffer relatively little in its level of exchange 
power. The rise of prices in the bimetallic country could not be 
very appreciable without the disappearance of all the gold from the 
monetary use. The total of money units would be increased, but 
not greatly increased, so long as gold circulated at all, since the 
number of units of silver inflow could not greatly exceed the number 
of units of gold outflow. The general change in prices attendant 
upon the process of displacement would be relatively slight so long 
as any gold remained in circulation. 

If, however, the joint coinage were international and general at 
the assumed ratio, such outflow of gold as took place must be solely 
into commodity uses. The adverse influence upon the purchasing 
powers of gold would be more marked and the difficulty of main- 
taining the actual exchange ratio of silver to gold at the coinage 
ratio would be much less serious. In either case, however, it is 
clear that the outflow of gold resulting from the inflow of silver can- 
not be unit for unit. With the lower exchange powers of the money 
unit more units are required. The inflow must exceed in units the 
outflow. 

With the world half bimetallic and half silver monometallic, the 
difficulties would be other, but not greater, in holding together the 
exchange parity and the coinage parity : Assuming still that the 
coinage of silver were to take place only when the fall in silver had 
brought its market ratio up to the coinage ratio, or assuming that 
the coinage ratio did not appreciably depart from the existing 
market ratio, the available supply of silver for the new coinage 



MONEY, CREDIT, AND BANKING 325 

would be small, and the share of the new product offering itself at the 
mint be greatly restricted through the coinage requirements of the 
silver standard countries. The coinage of silver could, then, have 
no great significance in its earlier stages either for good or ill. In the 
long run, however, the continued and perhaps increasing coinage of 
it might equally readily either bring about a depreciation of the 
money unit or prevent an appreciation. Where, then, there is an 
evident tendency toward the appreciation of gold as money, the 
concurrent coinage of silver must somewhat retard or prevent or 
even overbalance the trend of gold toward appreciation. And 
if either metal used alone as money were tending toward deprecia- 
tion, the adoption of bimetallism must somewhat accelerate this 
tendency. 

It should now be clear that, with the actual market ratio of 
silver to gold approximately 35 to 1, the free coinage of silver at the 
ratio of 16 to 1, if adopted by any one country, say by the United 
States, would almost immediately result not in national bimetallism, 
but in silver monometallism. The silver necessary to replace our 
1800 millions of gold would promptly be drawn from the world's 
supply of silver, or, if this amount of silver were not promptly 
available, would shortly be supplied through the absorption of most 
of the current product. Silver would doubtless sharply rise in its 
exchange ratios to commodities, and still more sharply in its ex- 
change ratio to gold, while gold would somewhat fall in its general 
level of exchange power. But the rise in silver and the fall in gold 
would together come far short of changing the world ratio from 35 
to 1 to 16 to 1, and in any case could not long maintain a ratio so 
vastly overvaluing silver either to goods or to gold, in view of the 
respective conditions of supply. 

The annual production of silver — at the coinage ratio of 16 to 
1 — is not far from 200 millions. Making, then, no account of the 
silver which free coinage at this ratio would attract to our mints 
from the present world's stock, and making no account of the in- 
evitable stimulus to production, it is evident that nine years would 
suffice to furnish from the mines as many new silver dollars as our 
monetary system now contains of gold dollars. The displacement, 
truly, could not be unit for unit ; it would require more than 1800 
millions of silver dollars to displace the 1800 millions of gold. But 
the world fall in gold could not be very marked. If, then, the na- 
tional free coinage of silver could by any possibility bring even the 
temporary concurrent circulation of silver with gold, it could bring 
this for only the shortest period of years. Speculative forecasts of 



326 THE ECONOMICS OF ENTERPRISE 

the ultimate certainty would, indeed, almost inevitably veto even 
the temporary success ; gold would vanish forthwith. 

Nor with the certain stimulus upon the production of silver and 
with the probable speculative activities, is it probable that inter- 
national bimetallism, no matter how widespread, could long endure 
at the ratio of 16 to 1, though it would probably estabUsh 
itself temporarily. Something like seven biUions of gold are em- 
ployed in one form or another in the world as money. The avail- 
able silver in the world — the silver not already in monetary use — 
is a matter of sheer conjecture, but probably does not exceed two 
billions out of a total stock of from eight to nine billions. Till, 
then, the seven billions of new silver necessary for the replacement 
of the gold, unit for unit, were found, the parity of silver with gold 
might be maintained. The temporary parity would, indeed, be cer- 
tain, were great speculative movements not both possible and prob- 
able. But it is at any rate clear that vastly more than seven billions 
of silver must be forthcoming in order to break the parity, in view 
of the limited non-monetary field to which gold could be driven 
and of the sharp depreciation to which it would be subjected. Gold 
would not drive out easily. With its progressive fall, progres- 
sively larger would be the requirement of silver to maintain the rate 
of gold outflow. With the great increase in the excess of silver 
inflow over gold outflow, the volume of money must be rapidly 
expanding and prices correspondingly rising. The volume of new 
silver requisite for the money need on the basis of this lugli level of 
prices would evidently be far beyond seven biUions. The last unit 
of gold outflow could be reached only on the terms of this last 
unit being worth more as commodity than the last unit of silver in- 
flow were worth as money. Finally, however, the complete dis- 
placement of gold by silver must come. And, in fact, the longer it 
should take, by reason of the more silver that it would require — 
the parity thereby the longer enduring — the more disastrous 
must be the rise in prices which would attend it. 

Take it, however, that the ratio were originally established at 
35 to 1 or at some ratio fairly well approximating the permanent 
market conditions attaching to the supplies of the two metals: 
At 35 to 1 nothing noticeable would happen — some little silver 
coined, an inconsiderable outflow of gold, an inappreciable effect, 
for a long time at least, upon the system of prices. At 30 to 1, 
all these different effects would be somewhat more marked. Re- 
calUng, however, that neither metal can entirely disappear from the 
currency until the supply of the incoming metal can be sufficiently 



MONEY, CREDIT, AND BANKING 327 

great to permit the last unit of inflow to be of less value than the 
last unit of outflow, it is evident that the process of the complete 
retirement of either metal must extend over a long period of time. 

Nor, from the basis of the present market outlook, is it probable 
that silver is more likely than gold to be the metal to suffer the 
relative fall. The present trend is rather toward the relative 
depreciation of gold. It might, indeed, be either of the two metals 
that would finally disappear. 

But if international bimetallism were one day to lead to one or 
the other monometaUism, there need be no disturbance or disaster 
attendant upon the divergence of the market ratio from the coinage 
ratio, if only the process were so gradual as to invite no great specu- 
lative activities. And the process would almost inevitably be thus 
gradual. No one would know the precise time at which the process 
of displacement became complete. Nor would the reestabUshment 
of bimetallism at some new ratio offer serious theoretical or practi- 
cal difficulty. 

International bimetallism is, then, an entirely workable policy 
from the point of view of monetary theory, no matter how serious 
might be the political problem of arriving at the necessary interna- 
tional adjustments or of preserving the unity of action necessary to 
the continuance of the system. The ultimate theoretical question is 
rather whether the system — granted that it is practicable — would 
be worth while. How much would it accomplish for the stabiUty of 
the standard? 

Not much if anything. First, however, it must be made clear pre- 
cisely what sort of stability it is that the nature of the standard 
problem requires. The stability of any intermediate as standard is 
important only in the deferred payment aspect of the case — only, 
that is, when the lapse of time affects the problem, as in loans, or 
in sales on time, or with the receipt of money for deferred outlay, 
or with serial incomes fixed by contract or by custom. 

It cannot, therefore, at all matter what some distant or original 
"level" of prices may have been. It matters merely that the level 
shall not change during the period with which the deferred payment 
relation is concerned. That in the average and over long periods 
the supply of money keep pace with the demand — outrunning the 
demand at one time with rising prices and lagging behind at another 
time with falling prices — neither solves nor advances the problem. 
No long-time and average stabiUty of prices is to the purpose. These 
intermediate and possibly offsetting fluctuations are the very crux of 
the problem. Whatever may be the new level once established, every 



328 THE ECONOMICS OF ENTERPRISE 

deviation from it is in itself a new disaster, a disaster which is in no 
degree to be mitigated by some earlier movement in the opposite 
direction and which is without virtue to justify or mitigate any later 
movement. Every variation is a separate evil in its own right inde- 
pendently of what has earher occurred or may later occur. The 
next variation, though in the reverse direction to the last, is a new 
and independent evil and is neither the better nor the worse by the 
fact that, running counter to some earlier variation or offsetting 
some probable future variation, it may tend to preserve some long- 
time average of general prices or may aid toward bringing an errant 
price system back to some original or mathematical norm. There are 
no norms for the purpose. Once a rise has taken place, that is in 
itself the sufficient reason why the new system should remain stable. 
Once a fall has taken place, there is no better reason for an opposing 
rise than for a further fall. We are concerned in the present ques- 
tion not to compare any given situation with some original situa- 
tion or some average of situations, but only with the situation 
immediately preceding. Every change in situation establishes a 
new base line of reckoning. No long-time basis which is not also the 
last basis is pertinent to the inquiry. 

In view of the fact that most credit relations are for relatively 
short terms and that most general changes in prices are due to 
something other than changes in the supply of the standard — are 
due, that is, to fluctuations in the volume of credit or to variations 
above or below the norm of psychological attitude with reference to 
investment or expenditure — there is no great significance for any 
purpose in that relative uniformity in the money supply which is 
expected by the bimetalhst from the double standard. All that he 
can rightly urge is that, so far as these long-time variations in the 
quantity of money do actually work out into long-time general 
movements in prices, they may somewhat accentuate the short- 
time changes due to other causes. And the bimetallist would rightly 
point out also that some deferred payment relations, e.g., govern- 
ment debts, are of very long duration. 

And for the bimetallic side of the case it is to be further noted 
that, with an increasing world population and an increasing per 
capita production, and with some possible trend toward the further 
division of labor between individuals, districts, and countries, there 
must come a fairly constant increase in the volume of exchanges to 
be mediated. Unless, therefore, the use of credit or of other sub- 
stitutes for coin is likely to increase and to increase pari passu 
with the volume of exchanges, there will be need for an increasing 



MONEY, CREDIT, AND BANKING 329 

supply of coin in order that a long average stability of prices be 
maintained. 

And the bimetallist would add that the sources of supply of 
either gold or silver are in the nature of the case limited, and that 
with the progressive exploration of the world, new sources of supply 
are likely to be less and less rapidly discovered. The supplies of 
neither metal alone are to be counted on to keep pace with the need. 
The law of diminishing returns appears to apply to the production of 
the precious metals. Thus the long future will probably develop a 
tendency toward falling prices, and any project promising, as a long- 
time influence, to mitigate this tendency must be a beneficent policy. 

And the case is really stronger than this : The products exchanged 
through the monetary mechanism are in the main promptly con- 
sumed. They do not greatly accumulate. If the social product is 
larger by 5 per cent each year, the aggregate supply of exchange 
media will need to expand by this same per cent and this 5 per cent 
expansion be computed for each succeeding year upon the basis of 
the volume of the media of the preceding year. There will be required 
something like a geometrical increase in the volume of money, if 
the long-run but gradual shrinkage in prices is to be avoided. 

Having now in mind the ultimate meaning and the ultimate diffi- 
culties in the maintenance of any long-time stability in prices — 
what has bimetaUism to promise either for short-run stability, the 
important thing, or for long-run stability, the relatively unimpor- 
tant thing? 

It is evident that with bimetallism once established, the supply 
of coin for money purposes will be greater, and general prices higher 
than had either metal been used alone ; on no other basis is there 
anything to be discussed either for good or ill. 

With bimetallism established, we start, then, with a new base line 
of prices. What are the chances of deviation from this line as com- 
pared with the chances from a one-standard basis ? Recall once again 
that we have no concern with any or all of the possible fluctuations of 
the past ; nor are we concerned with any possible future fluctuations 
unless as measured from the corresponding — the immediately pre- 
ceding — price system. With each new base line, the original prob- 
lem would merely be repeated : Measuring from each new situation, 
with which policy, the single or the double standard, is fluctuation 
the more probable and the probable fluctuations the more marked ? 

There are four possibilities in any bimetallic situation : (1) that 
both gold and silver are expanding in supply faster than the expand- 
ing need ; (2) that both are lagging behind the need ; (3) that gold 



330 THE ECONOMICS OF ENTERPRISE 

is outrunning the need, while silver is lagging behind ; (4) that silver 
is outrunning the need and gold lagging behind. 

(1) Both outrunning the need : 

If both are equality outrunning the need, a rise in prices is inevi- 
table as measured from the general prices immediately preceding. 
Neither metal will be displacing the other. The rise in prices will be 
neither greater nor less than it would have been with either alone, 
reckoning, of course, in each case from the price system appropriate 
to the case. 

But one metal will probably be manifesting a more rapid increase 
than the other : then the rise in prices will not be as marked with 
both metals together as with the worse one of the two, and will be 
more marked than with the better one of the two alone : The result 
will be worse than with the better and better than with the worse. 

There is nothing to choose here between the bimetallic and the 
monometallic systems. 

(2) With both metals underrunning the need, a parallel analysis 
holds. The fall in prices will be less marked than with the worse 
metal alone and more marked than with the better metal alone, 

(3) and (4) With one of the metals outrunning the need and the 
other metal underrunning, the price system attaching with the 
coinage of both metals would be preferable to monometallism with 
either one, reckoning from the situation appropriate to that one. 

Something, then, there is, in the long-run aspect, of advantage 
in the bimetallic system over the monometallic ; in two chances out 
of four bimetallism offers the better outlook. But does this mean 
that, for these long-run purposes, bimetallism would be the prefer- 
able system — for whatever of significance there is in the long-run 
computation? Possibly so, but not clearly. On the side of the in- 
fluences of technique, the two metals would probably concur rather 
than diverge in tendency. So far as the discovery of new sources 
of supply were the decisive factor — though probably a factor of 
diminishing importance — the prospect of advantage would be on 
the whole greater under bimetallism. 

We may conclude, then, that in a period of falling prices, bi- 
metallism would, at its inception, tend to mitigate the tendencies 
toward generally lower prices, and would offer the prospect of fur- 
ther advantages in the remote future — advantages, however, of no 
great significance in the problem. In a period of rising prices, 
the harm attending the initial step would pretty clearly outweigh 
such remote and unimportant and essentially contingent advantages 
as might befall. 



MONEY, CREDIT, AND BANKING 331 

Having now examined the relations (1) of gold to other 
moneys, (2) of gold and these other moneys to banking, and 
to the banking function of credit, (3) of banking and credit 
to the volume of currency, (4) of the volume of currency — 
moneys and credit — to prices, and (5) of the relation of 
the volume of currency to the volume of funds for loan at 
interest, — we are ready to undertake an examination of 
the forces and processes fixing at any time the rate, or the 
different rates, of interest. 



CHAPTER XVIII 

LOAN FUND CAPITAL 

The rate of interest. — Interest in the actual competitive 
organization of society has already been defined as the pre- 
mium which general purchasing power, expressed in terms 
of money, commands over future purchasing power similarly 
expressed. The rate of interest is this premium expressed 
as a percentage — whether as a rate of increment to attach 
at a future time to a present sum of dollars as principal, 
or as a percentage of discount to which a future sum of dollars 
is subjected in reaching a sum of present worth in dollars. 
Always and everywhere an interest rate reports the relation 
of exchange existing between present dollars and future 
dollars. The rate expresses the terms of exchange as a 
ratio — 100 of present dollars against 105 of future, or 
105 of future dollars against 100 of present dollars. 

This is not at all to assert that the same phenomenon — 
or a similar phenomenon — might not be present in some 
other form of society and be expressed in other terms, but 
only that in the present society interest is a pecuniary cate- 
gory in a dollar computation. Much confusion will be 
avoided by holding this truth in firm grasp. 

The rate an exchange adjustment. — The terms on which 
present purchasing power exchanges against future purchas- 
ing power is therefore one more problem in the adjustment 
of price. There are offers of present purchasing power and 
there are bidders for it. The rate per cent is the point of 
adjustment between supply and demand. The interest 
problem, then, like any other problem in price, leads to an 
examination of the nature and sources of the demand for 
loans of purchasing power, on the one side, and of the origin 
and nature of the supply, on the other side. Our problem 

332 



LOAN FUND CAPITAL 333 

will, then, later lead to an examination of the two inevitable 
aspects of every price investigation : (1) What, on the 
demand side, determines the dispositions to pay, (2) what 
determines how great is the supply, and the terms on which 
the various units of it are offered. 

Capital and loan fund capital. — First, however, there is need 
to make a general survey of capital in the large, in order to make 
precise the place and significance in society of the loan fund variety 
of capital. That moneys and credits are private capital will need 
no further repetition. But, as forms of capital peculiar to the com- 
petitive organization of society, are they not distinctively and 
peculiarly competitive in their functions? And if either money 
or credit is social capital, are both social capital upon the same 
level?! 

What media are capital. — It was made clear in Chapters III 
and IV that in a competitive society the medium of exchange is 
a necessary means to the enjo5anent of the great advantages attend- 
ant upon the division of labor; that it is solely through being 
a price economy — a money economy — that a competitive society 
can be efficiently organized for purposes of production; that 
precisely because exchange is a socially productive process, the 
commodity or commodities selected as intermediates in exchange 
must be held to serve a function as important as that of any other 

1 That the concept of social capital is essentially a vague concept 
is not to be questioned ; all of the preceding discussions have, in- 
deed, in terms or by repeated implication, emphasized this objec- 
tion and this protest. Only by antithesis to the intelligible and 
actual categories of individual enterprise can the social concept 
approximate to anything like tangibility. But none the less the 
notion has a content — only that it is diseouragingly indefinite. 
There clearly is a grand total of land and of equipment contribut- 
ing to the aggregate production and consumption. But precisely 
what things rank within this total ? Or what shall stand as the 
common denominator under which they can be aggregated ? Com- 
petitive prices will not serve. 

The difficulty with the concept of social capital is really the same 
as with the concept of social productivity : appraisals of the objec- 
tive facts are mixed and confused in the concept with the facts 
themselves. Is land capital ? All land — wheat, champagne, 
and opium lands equally ? So, again : some factories are social 
capital. But corset factories ? Peruna and Hop Bitters factories ? 



334 THE ECONOMICS OF ENTERPRISE 

of the tools of industry. Currency — money, or credit substitutes 
for money — is one of the most effective of labor-saving appliances. 
Therefore, the bullion utilized for this purpose is not only social 
wealth and social capital, but it is social capital at a very high 
degree of productiveness — a wise and necessary social investment, 
a means of conveyance, of transportation, of the same general 
type of service as highways or freight cars, but outranking these 
in degree of usefulness. 

Money is, therefore, not merely private capital, but it is also 
social capital, a source of gain to the individual and a source of 
service to society. Bullion money is, however, not the only capital 
that is lent. Bank notes and greenbacks and deposit credits are 
clearly private capital ; are they also social capital ? If every 
creditor is the richer by the credit, is there not somewhere a debtor 
who is correspondingly poorer ? Credits are mere claims ; to cancel 
them would seemingly not affect the total social wealth, but would 
only redistribute it. 

Credit as capital. — But the truth is that so far as these relations 
of liability from one member of society to another serve as media 
of exchange, they are more than credits; they are credits which 
are fulfilling a social function. However imperfectly they may 
fulfill this function, they dispense with the use of bullion for that 
purpose. If coinage currency is a labor-saving device, credit 
currency is a bullion-saving device. Regarded, then, in this light, 
it is not illogical to view credit money as social wealth. The 
objection is, however, also forcible that knowledge and experience 

Town Topics printing presses ? Burglars' jimmies ? Tax-farming 
contracts ? Breweries ? Soda fountains ? Counterfeiting tools ? 

Or, again, carpenters and masons are socially productive ; so — 
often — the doctors ; most preachers — if their doctrine is good ; 
some teachers — those that teach the right theory. But ballet 
girls ? Lawyers ? Adulterating chemists ? Bar tenders ? Sol- 
diers ? 

It is the unprecision of these social concepts which, even when 
by antithesis they are relevant to competitive activities, leaves 
the concepts unadapted to accurate and analytical thinking. 
Thus the justification for employing them is found only as pro- 
viding a vague or negative background against which to outline 
the precise and actual concepts of the present competitive order. 
Competitive capital and social capital are neither concentric nor 
separate circles. Each includes some part of the other's field — 
intersecting circles — only that the competitive concept is limited 
and definite in circumference, the social concept rather a formless 
smudge than a circle. 



LOAN FUND CAPITAL 335 

are likewise effective for the saving of labor and of wealth, and are 
yet not wealth — whatever other or better thing they may be 
held to be. They belong rather to the organism than to the en- 
vironment; they are not facts objective to the possessor. If a 
method were possibly to be discovered in a competitive society 
of dispensing with money of any sort, no room would remain for 
asserting that an increase in wealth had so far taken place. The 
change would be one of institutions, of human development, precisely 
as, when medical wisdom is more, pills and tonics may be less. 
But the wisdom is not wealth, and wliile the pills are still wanted 
they are wealth. 

The distinction is a nice one and not altogether satisfactory. 
If credit is not social wealth, it is none the less clearly private 
wealth. And it is a sort of private wealth that has, at times and 
within limits, a social serviceability. Money, at any rate, is not 
in any especial or peculiar or emphatic sense a distinctly private 
and competitive form of capital. It is merely a form of private 
capital that is peculiar to the competitive organization of society — 
characteristic of it and central in it, and of the highest significance 
in the actual functioning of it. It and its substitutes are the things 
trafficked in in the interest market. Credit, as the substitute 
for money, and as in volume outranking money itself as medium 
of exchange, and as, by its variations in supply, furnishing most of 
the important changes in the market situation and the market 
rate of adjustment of supply to demand, is the chief and most 
important ingredient in the aggregate fund of suspended purchasing 
power and in the supply of currency for loan. 

What private capital includes. — Private capital, that form 
of capital with which actual business is concerned, includes, as we 
have seen, all forms of durable private wealth — all such property 
of any individual as requires an appreciable period of time for the 
rendering of its service, — all possessions any of the incomes of 
which are so far remote in time that some of these suffer in present 
price estimation by the very fact of this remoteness, — all wealth 
the present worth of which involves the application of the principle 
of time discount, • — all wealth remunerated according to the dollar- 
time unit. Private capital is merely those private possessions which 
are bases of private income. This capital is productive, truly, — 
acquisitive, gainful, — but not necessarily so in the social sense of 
contributing to the general welfare or of increasing the aggregate 
of incomes, but only of increasing the owner's income. 

We shall later have occasion to examine the relations between 



336 THE ECONOMICS OF ENTERPRISE 

saving or abstinence and the amount and the growth of capital. 
For present purposes, however, it is important only to understand 
fully in what private capital actually consists, in order thoroughly 
to appreciate the relation which exists between the supply of loan 
fund and the quantity of private capital in general, and the connec- 
tion also between the supply of loan fund and the income upon 
private capital in general. 

CoUectivist capital. — For Crusoe, capital, as his store 
of wealth, his well-to-do-ness, his aggregate of provision 
for the future, would obviously include his land as well 
as his other equipment goods, irrespective of whether any 
process of saving had conditioned their existence, or whether 
any possible waste or improvidence or ill luck could impair 
or destroy them. His boat and his appliances for hunting 
and fishing would rank in the same class with his garden, 
his quarries, and his range of land for hunting. Whether 
his place of shelter were a cabin of his own building or a 
cave of his finding, in either case it would be a part of his 
possessions for the rendering of service with time. Whether 
its origin were in an earlier saving, and whether its contin- 
uance were conditioned upon continued restraint, or whether, 
on the contrary, it existed as both an original and an inde- 
structible bounty of nature, would be alike irrelevant. It 
would be sufficient that the thing exist with its significance 
for continuing service. In truth, the land that always was 
and could not be deteriorated would be possibly the best 
part of his belongings. 

And together with these unproduced, unearned, and 
indestructible items of wealth effective for service with 
passing time, and together also with his appliances for 
fishing and hunting, he would possess some small supply, 
however meager, of goods for amusement and pleasure and 
comfort. These also yield their appropriate incomes. And 
included within his total possessions for future service would 
be his store of food for the time of dearth and his supply 
of fuel for the season of cold. This food and this fuel would 
rank with land and garden plot and ax and rifle, each de- 
riving its significance and its capital standing from its 
applicability to future needs. 



LOAN FUND CAPITAL 337 

Obviously, then, some part of the capital store of an 
isolated individual, and the larger part of the increase in 
this store, must be due to the productive efficiency either 
of his labor or of the natural wealth in his control. His 
capital would be his durable possessions. But the amount 
and the rapidity of its increase, depending in the first in- 
stance upon the quantum of product, must depend second- 
arily and at the final stage upon his disposition of this 
product — upon whether he consume it or save it. It may 
be, however, that some of this increase he could not consume 
if he would : the trees of Crusoe's island will grow and the 
walls of his cave will harden, all to his advantage and beyond 
his power of veto. 

A collectivist society presents a case similar in most 
respects. Some part of its capital is the pure bounty of 
nature, and not a little of it is beyond the possibility of wear- 
out or waste. But, in the main, the increase will be subject 
to the same twofold condition of production and of appro- 
priation to future needs. Some part of this provision for the 
future will embody itself in instrumental goods, some part 
in durable consumption goods, some part in consumable 
goods postponed in time of consumption. To the extent 
that the economy is collective it has no other way of increas- 
ing the social possessions. Social capital is durable social 
wealth. 

Competitive increases in social capital. — In the com- 
petitive society, however, little or nothing of the foregoing 
holds true, excepting so far as the facts are somehow trans- 
lated into a collective accounting and a balance struck in 
collective terms. The actual economy is characteristically 
an entrepreneur economy in which production and business, 
and the direction of them, rest with the entrepreneur in his 
pursuit of gain. True, some part of the activities of society 
and some part of the increase in social equipment are con- 
trolled by the state or the government ; but just so far the 
society is not competitive in character, but collective. In 
the entrepreneur organization of things, there are important 
steps intervening between individual saving and social 
saving, either of consumption goods or of production goods. 



338 THE ECONOMICS OF ENTERPRISE 

The entrepreneur is in charge. Or, if the corporate organiza- 
tion is chosen, even then the first step is to get together 
funds, to collect a number of small capitals into an aggregate 
sufficiently large for the purpose. It is always with the 
entrepreneur function that the direction of investment lies. 
On the whole, therefore, the increase of industrial equip- 
ment does not take place in the same way in a competitive 
society as in the isolated or the collective economy. Doubt- 
less a man in possession of property or of funds may, in the 
competitive society, rent out his property, for example a 
farm, rather than sell it ; or he may himself make directly 
an increase of equipment goods. Just as a collective 
society might set aside a portion of the current social income 
for future use, or might apply a certain share of productive 
power to the creation of aids to future production, or of 
goods for future service, the laborers so directed subsisting 
meanwhile upon the current production of industry or upon 
stored-up products, so the individual in a competitive society 
may — but ordinarily does not — set himself to the direct 
creation of social wealth. Instead, he commonly saves 
" money " out of his individual income, or sells property, 
in either case lending his available funds to an entrepreneur 
or to an entrepreneur enterprise. The resulting credit 
is as much a part of his private wealth as was^ the current 
income or the receipts from the sale. 

It does not, however, follow that his own increase in 
wealth is also a social increase. The buyer of the things 
which this capitalist sells may forthwith consume them ; but 
this does not at all matter to the capitalist or to the amount 
of funds which he has for loan. Soj_.tha. saving out of his 
individual income is not at all certain to be a saving to society 
in the aggregate. It suffices for his purpose and for the 
growth of the loan fund that somehow he has secured a 
certain income, and has refrained, in some measure, from 
making purchases in the market. The aggregate social 
consumption is not the less because of this " abstinence " ; 
the other purchasers have simply profited by this diminution 
of demand. When he concludes — as an equivalent of his 
past restraint — to consume in excess of his current pro- 



LOAN FUND CAPITAL 339 

duction, other purchasers will suffer by the resulting exten- 
sion of demand. In short, individual " abstinence/' in 
the present industrial organization, is a condition precedent 
to social saving, and therefore to the possibility of social 
capitalization; but it is not social saving, nor is it social 
capitalization. The capitalist in the above case has saved 
himself a right to direct in purpose and manner a future 
application of wealth or activity. It must rest with the 
decision of the borrower of the capital funds — ■ and with 
the lender's decision only as it affects the decision of the 
borrower — whether social capitalization, an increase in 
social equipment or durable goods, does or does not take 
place. Thus, while the creation of social wealth may take 
place without an appeal to the loan market, it does not or- 
dinarily so take place. Obviously, it is not an easy matter 
to estimate the volume of the more direct and more simple 
form of the increase of social wealth. It suffices to say that 
it is relatively a diminishing method, that it calls for no 
especial labor of analysis, and that it is for the most part 
unrelated to the phenomena of the loan market — to the 
borrowing of capital and to the fixation of interest. Speak- 
ing in the large, wealth or capital in the social sense does 
not get borrowed, and, if borrowed, is not involved in the 
interest contract. 

Thus the amount of social wealth or social capital in society is 
no test or measure of the supply of loan fund excepting in the degree 
that the individual holdings of social wealth may affect the resources 
of individual lenders or the credit of individual borrowers. An 
illustration will serve to make the principle clear : Assume an 
isolated community of 1000 farmers, competitively organized but 
still in a barter economy — that is, without money and without 
institutions for the circulation of credit. Suppose that 999 of 
these farmers have each his farm with the ordinary equipment 
of implements, the while that there is still another farmer with 
999,000 head of cattle. Assume now that an entrepreneur from 
somewhere appears in the community with the purpose of construct- 
ing a railroad : how shall he go about the financing of it ? 

There is no capital available for his purposes. It is true that 
there is one wealthy man in the community, a man who would 



340 THE ECONOMICS OF ENTERPRISE 

gladly, on approved security, lend indefinite sums — of cattle. 
But railroad construction cannot be financed on this basis, unless, 
indeed, to the extent that the cattle can be made to serve as a 
form of currency. The difficulty is not that there is a lack of 
wealth in the community, but that this wealth is not in practicably 
lendable form. 

But if, now, it be assumed that these cattle can be sold out on 
credit among these nine hundred and ninety-nine farmers, their 
notes taken and discounted into deposit credits ; or even if against 
these farmers there are taken contracts or due bills or acceptances 
or orders dischargeable on demand in labor or in produce, there 
will forthwith exist in this society a supply of loan fund capital 
of a character suited to the needs of the enterprise in hand. 

And if it be objected that this really amounts to the same thing 
as lending the cattle, only that the method is roundabout and 
less simple, all this must be admitted, but with the important modi- 
fication that the other way is, for the purpose of the borrowing 
of capital, an impracticable or even an impossible method : debts 
must exist, that is, collectible rights in money or in other forms of 
wealth — for money is for many purposes only a form of credit 
— must exist, before these credit rights can be lent ; and nothing 
else can practicably be lent. 

And there is tliis still more important modification : Suppose 
all these cattle to have been, immediately after the sale, swept 
away by disease. If the debtors are still solvent, the loss is theirs 
and not that of the capitalist. They are in the aggregate much 
poorer ; but he is as well off as before, and has not a jot less " capi- 
tal " to lend. That is to say, the volume of loan fund in a society 
has no direct or necessary relation — still less, proportion — to 
the wealth of the society in question. It is true that if these farmers 
had nothing left to pay with, the debts might be uncollectible and 
thereby fall out of the lists of capital; but so also they might 
not, if only it were true that the laws of the society or its business 
code of morahtj^ made the debts collectible either in terms of com- 
modities or of services. A debt that is secured by character is as 
good an investment and as truly private capital as any other, if 
only it be really as secure. 

The nature and supply of loan funds. — It is thus clear 
that in the typical case of an appeal to the loan market 
for so-called capital there need be neither social capital nor 
social wealth in existence to which the loan fund capital 
traces its existence or upon which it is based or into which 



LOAN FUND CAPITAL 341 

it has as yet flowed. There exist against society in the form 
of hoarded money, or against banl^s in the form of bank- 
notes, deposits, and savings accounts, or against individuals 
in the form of different species of claims, rights of direction 
over the application of labor and commodities. Every 
credit represents such a right. The loan market consists 
of these rights and of nothing else. It is not because of her 
store in hand of iron or wood or provisions that England is 
able to supply the so-called capital for endless railroad 
building; and the construction of railroads in America or 
Africa by means of English capital does not ordinarily mean 
the transportation from England of any considerable amount 
of commodities for this purpose. 

It is true that there is a theoretical outside limit to the amount 
of capitalization which can take place during any particular period. 
Only so much productive energy can be diverted to future production 
as can be spared from the necessities of immediate consumption. 
But the demands of immediate consumption are very flexible. 
Practically, no limit of any sort exists except the food limit ; and 
the supply of food being mostly periodic, and, if scanty, incapable 
for a period of some months of being largely affected by an immediate 
application of labor, and not ordinarily increased above the average 
by the application of an exceptional amount of labor to the pro- 
duction of a new crop, it results for practical purposes that the 
amount of labor applicable to remote ends is not greatly lessened 
by insufficient harvests. It may, indeed, be increased by the sharp 
competition of wage-earners to obtain as large a share as possible 
of the short food supply. It is true that this view leaves out of 
consideration the average of years; for, in this average, as many 
laborers will devote themselves to the production of necessaries 
as find the prices of necessaries averaging high enough to make it 
worth while. Normally, the application of energy for future 
purposes must be secured from laborers not requisite to this pro- 
duction of necessaries for immediate consumption. But how 
much of this labor, possibly applicable to remote ends, will be so 
appHed, will depend not on the possessors of capital in the form 
of shops, and tools, and lands, nor upon the possessors of products 
ready for consumption, but upon the possessors of these closes 
(claims) en action against society or against individual members 
thereof, — these rights of direction of labor, of which bank and 
savings deposits form a large proportion and are typical examples. 



342 THE ECONOMICS OF ENTERPRISE 

Nor, usually, does any possessor of material property or wealth 
become a lender of capital until he has parted with his material 
wealth and become a holder of some proportion of these rights. 
The creation of social capital is ordinarily conditioned on the 
transfer, in the form of loans, of these rights of direction to pro- 
jectors of enterprises. It is only the loan fund that commonly 
is lent. 

Funds and aggregate welfare. — Loans are made from such 
private cash resources of individuals as, not being spent, are avail- 
able for lending. Through the lending of these there may or may 
not result an increase in the aggregate social wealth. In either 
case the loans remain equally private capital. If the funds go to 
finan'ce administrative deficits or jingo wars, this is neither better 
nor worse for the investor than if they bring into existence rail- 
roads or flouring mills or chair factories. He may get even better 
rates of interest return by financing some spendthrift expectant 
heir, and need not suffer in point of security. 

We may conclude, then, that the loan fund is a category of 
capital peculiar to itself, and that whether capital funds are or are 
not abundant in a given society is a matter not dependent upon the 
total supply of social wealth or social capital ; and that whether 
social capitahzation does or does not take place is not decided 
either by the amount of wealth in the society or by the amount of 
available loan fund, but only by the direction which the invest- 
ments made through this loan fund take. 

Loaned thing, repaid thing, premium thing, all currency. — 

Holding now firmly in mind that the loan fund form of 
capital is a fund of purchasing power seeking borrowers, — 
a fund made up of the standard commodity and of units 
of credit interchangeable with it, — we are in possession of 
all the facts fundamental to the interest problem. It is 
in terms of the standard that the interest contract actually 
runs. And note once again that not only is the interest 
premium one of present purchasing power in terms of the 
standard over future purchasing power in terms of the 
standard, but that, in our present society, it can hardly be 
anything else. It is true that in any relation of deferred 
payments anything — wheat, cloth, cattle, labor — might 
be taken as the standard in which payment should later 
be made, just as now rent is sometimes paid in grain. But 



LOAN FUND CAPITAL 343 

for most purposes there is only one practicable standard. 
As it is general purchasing power that is commonly borrowed, 
so it is commonly only in general purchasing power that 
payment can practically be stipulated. The business man's 
expenses are all reduced to terms of price and his gains, 
if he make any, are a differential in price. And, as we have 
already seen, no other computation is of the slightest moment 
to him, unless possibly as somehow derivative from the price 
gain which he is engaged in seeking. Any practicable 
medium of payment must be either something that the 
creditor can use directly or something that he can employ 
as purchasing power. To choose as a standard a commodity 
for direct use would be difficult, and to choose any other 
commodity is to make that commodity an intermediate of 
exchange for the particular case — and to accept the greater 
dangers of fluctuation which go with all ordinary commodities 
— from which dangers, indeed, money is only relatively 
exempt. But money is at any rate relatively exempt; 
and for most of the purposes of the business man the slight 
fluctuations to which it is subject are mostly or entirely 
irrelevant. 

But even if money were not the best medium or standard 
in which loans may be made, credits extended, payments 
contracted, and interest computed, it would still stand as 
true that it is the actual medium for all of these purposes. 
Interest is a charge for the time-use of wealth, computed 
upon the dollar-time unit — a per cent, per dollar, per 
period. 

The situation stated. — It may now be taken as established, 
and must be firmly grasped, that the " capital " that is 
borrowed is suspended purchasing power in the form of 
money or of credit substitutes for money; that the credit 
granted runs as a specific sum of money, the standard, and 
that the debt incurred runs as a promise to return a specific 
sum of money; and that capital in the credit relation is 
something quite different from social equipment or even from 
individual wealth in general. If, therefore, the term loan 
fund or some equivalent term were adopted to indicate the 
actual thing that is borrowed, a deal of confusion would 



344 THE ECONOMICS OF ENTERPRISE 

be avoided, and less hazy conceptions would obtain with 
regard to the " centers of capital " and the " increase of 
capital " and the " countries rich in capital." The thing 
loaned as capital is merely the power to buy things or to 
direct the application of productive energies. The abun- 
dance of loan funds is determined more by the degree of 
complexity in credit relations than by the existing quantity 
either of social or of private wealth. 

The loan fund not a theoretical novelty. — Some progress has 
perhaps been made in the foregoing analysis toward a clear defini- 
tion and a conscious recognition of the loan fund subdivision of 
private capital. It is now to be noted that there is, in essentials, 
nothing new or revolutionary in this loan fund doctrine : this is 
indeed not so much in need of recognition as of emphasis. The 
new significance of the doctrine will be rather found in the uses 
that are later made of it. The truth is that the literature of polit- 
ical economy has for decades been full of the loan-fund concept, 
sometimes consciously and explicitly held, sometimes tacitly and 
half-consciously assumed. The points of present emphasis are 
merely, (1) that the loan fund is distinctly and exclusively a con- 
cept belonging to the regime of individual property and competitive 
business, that it involves a clear recognition of the distinction 
between social capital and private capital, and that it is meaning- 
less from the social point of view and is inconsistent with it, 
(2) that it is not private capital in general with which the capital 
market is concerned, but only the loan fund subdivision of private 
capital. 

Consider, for example, the following from Ricardo : 

" Capital is apportioned precisely, in the requisite abundance 
and no more, to the production of the different commodities which 
happen to be in demand. With the rise or fall of prices . . . 
capital is either encouraged to enter into, or is warned to depart 
from, the particular employment in which the variation has taken 
place. Whilst every man is free to employ his capital where he 
pleases, he will naturally seek for it that employment which is 
most advantageous ; he will naturally be dissatisfied with a profit 
of 10 per cent, if by removing his capital he can obtain a profit 
of 15 per cent. ... It is perhaps very difficult to trace the steps 
by which this change is effected : it is probably effected by a manu- 
facturer not absolutely changing his emplojTiient, but only lessen- 



LOAN FUND CAPITAL 345 

ing the quantity of capital he has in that employment. In all rich 
countries there is a number of men forming what is called the 
moneyed class ; these men are engaged in no trade, but live on the 
interest of their money, which is employed in discounting bills, 
or in loans to the more industrious part of the community. The 
bankers, too, employ large capital on the same objects. The capital 
so employed forms a circulating capital of a large amount, and is 
employed, in larger or smaller proportions, by all the different 
trades of the country. There is perhaps no manufacturer, however 
rich, who limits his business to the extent that his funds will allow ; 
he has always some portion of this floating capital, increasing or 
diminishing according to the activity of the demand for his commodi- 
ties. When the demand for silk increases, and that for cloth dimin- 
ishes, the clothier does not remove with his capital to the silk trade ; 
but he dismisses some of his workmen, he discontinues his demand 
for loans from bankers and moneyed men, while the case of the sUk 
manufacturer is the reverse : he wishes to employ more workmen, 
and thus his motive for borrowing is increased ; he borrows more, 
and thus capital is transferred from one employment to another, 
without the necessity of a manufacturer discontinuing his usual 
occupation." ^ 

Bagehot, like Ricardo, oblivious of the prevailing confusion 
of private with social capital, declares that capital includes 
" two unlike sorts of commodities, cooperative things which help 
labor, and remunerative things which pay for it ; "^ and further, 
still in full conformity with Ricardo, remarks : 

" Suppose the corn trade to become particularly good, there are 
immediately twice the usual number of corn bills in the bill brokers' 
cases ; and if of the iron trades, then of iron bills. You could almost 
see the change of capital if you could look into the bill cases at 
different times." ^ 

But note that Bagehot does not make it altogether clear whose 
is the capital that is changing ; but it is perhaps fairly to be assumed 
that he takes it to be the capital of the lenders. 

Cairnes's statement upon this point is hardly more satisfactory ; 
but the loan fund variety of capital receives equally distinct rec- 
ognition : 

1 Ricardo, Political Economy, Gonner's edition, Chap. IV, See. 29. 
^ Economic Studies, 2d ed., p. 55. 
^ Bagehot, op. cit., p. 45. 



346 THE ECONOMICS OF ENTERPRISE 

" The existence of a large amount of capital in commercial 
countries in disposable form, or, to speak less equivocally, in the 
form of money or other purchasing power, capable of being turned 
to any purpose required, is a patent and undeniable fact. Nor 
is it less certain that this capital is constantly seeking the best 
investments, and rapidly moves towards any branch of industry 
that happens at the moment to offer special attractions." ^' ^ 

Whence come these sums that Ricardo's manufacturer is borrow- 
ing from the m-oneyed class? It is a commonplace that capital 
comes from saving; and it is unfortunately almost as much of a 
commonplace that savings are in the same sense capital. But, 
as we have seen, private saving is merely the individual postpone- 
ment of the consumable services of private wealth ; the people who 
save, the people whose steady streams of contribution flow into the 
loan market, are ordinarily merely receivers of income, who, having 
held their expenditures below their receipts, have something to 
lend. Their decision to postpone their personal exercise of their 
rights of consumption is carried into effect, either by the method 
of holding their purchasing power in hand in the form of money, 
or by transferring this power to other persons by some direct or 
indirect method of loan. The borrower, whether for purposes 
of consumption or for purposes of production, desires to obtain 
disposal over this purchasing power. It is only as a question of 
security that it at all matters to the lender whether consumption 
goods or raw material or machinery or labor be the purchased fact. 

Loah contracts versus rental contracts. — But why do lending 
and borrowing actually take place in terms of money loans and under 
the interest contract rather than in terms of the loan of things under 
the renting contract (bailment)? In some part this is doubtless 
due to the difficulty of determining precisely, and of estimating 
accurately, the condition of the goods when rented, and in formu- 

• Cairnes, Leading Principles, p. 63. 

2 "Every one is aware that England lias much more immedi- 
ately disposable and ready cash than any other country. But 
very few persons are aware how much greater the ready balance 
— the floating loan fund, which can be lent to any one for any 
purpose — is in England than it is anywhere else in the world. A 
very few figures will show how large the London loan fund is, and 
how much greater it is than any other. The known deposits — 
the deposits of banks which publish their accounts — are : in 
London (December 31, 1872), £120,000,000; in Paris (February 
27, 1873), £13,000,000 ; in New York (February, 1873), £40,000,000; 
in German Empu-e (January 31, 1873), £8,000,000; and the un- 



LOAN FUND CAPITAL 347 

lating a contract adapted to fixing the treatment which the rented 
good shall receive from the borrower or the condition in which it 
shall be returned; or, again, of determining accurately how far 
the contract has fallen short of fulfillment. In even larger degree 
the preference for the contract for the loan of money and the 
payment of interest is to be explained by that lack of coincidence 
of demands which has already been examined with reference to 
barter. The manufacturing entrepreneur or the railroad contractor 
wants ordinarily something else than the precise goods which the 
lender can deliver. Money will precisely serve the need when 
nothing else will. It is as a commodity of general acceptability 
that money most easily finds lenders and borrowers. 

Failures in coincidence. — But more commonly the difficulty is of 
still another sort : if A has for rent or for sale the thing which B wants to 
borrow or buy, and B has in hand or in prospect the thing desired 
by A in which to make or to promise payment, and if, in addition, 
A and B chance to come together, a failure in the coincidence of 
desires is still likely ; the credit of B may not be sufficiently well 
known to A, or may be otherwise unsatisfactory. So, without 
some credit intermediary or guarantor, the contract may not close. 

For many reasons, then, the practicable method for the entre- 
preneur is to buy rather than to rent, even where the subject matter 
of the relation might make renting possible. The competitions 
of entrepreneurs center in the borrowing of funds with which to 
carry on business operations in general, inclusive of the buying 
of things. 

Funds both from savings and banking. — Wlience, then, come 
these funds that are borrowed ? Unquestionably some of them 
come from those who prefer to invest rather than to spend. 
In this sense, as we shall later more fully see, there is a savings 
contribution to the supply of funds. But in any case, such 
funds as are saved are likely to be deposited with commercial 

known deposits — deposits in banks which do not publish their 
accounts — are in London much greater than those in any other 
of these cities. The bankers' deposits of London are many times 
greater than those of any other country." — Bagehot, Lombard 
Street, Chap. I, p. 4. 

A well-informed estimate in 1895 placed the bank deposits of 
Great Britain at £700,000,000. In the United States at present 
(1913) the deposit liabilities of the national banks alone run up- 
wards of six billions of dollars. 



348 THE ECONOMICS OF ENTERPRISE 

banks or savings banks or insurance companies, — inter- 
mediate credit institutions acting in such cases as guarantors 
or underwriters of debts. Borrowers, in turn, mostly apply- 
to credit institutions for credit accommodation. 

But the function of the banks is much more largely in 
supplying funds of their own creation than as acting as the 
lenders of the funds of others. It is clear that banks create 
currency by issuing credit, and that not merely is this 
function of issue — this creation of exchange media — a 
bringing into existence of currency available for the purposes 
of the borrowers, but also that, like other currency, it passes 
from hand to hand as purchasing power and as means of 
payment. It may well be true — it will, indeed, later be 
emphasized — that in ultimate effect the banker, in the 
ordinary discount relation, is a guarantor of the borrower's 
credit ; but it suffices for the immediate need to point out 
that the result of bank lending is to expand the quantity 
of circulating medium, the currency available for loans. 
When the hank lends $1000 to a customer, or discounts 
$1000 of paper offered by him, it really gives its own promise 
to pay $1000 on demand in exchange for a time promise 
given to it by him to pay an approximately equal sum. The 
outcome of this exchange of promises is an enlargement of 
the supply of media of exchange. The credit granted 
becomes forthwith a circulating credit, as efficient as actual 
money for the processes of exchange. The methods pecuHar 
to banking enable one dollar of reserves to support several 
dollars of credit media appropriate to the loan fund service. 
The supply of this loan fund form of capital is thus more 
largely a question of the organization of banking and of the 
degree of banking activity than a question of the wealth of 
society. Banks are the principal creators and the principal 
custodians of loan fund capital. Thus the banking centers 
are the great capital centers. Easy banking conditions mean 
easy funds. If loanable capital were the expression of the 
wealth of society or of its possessions of social capital, it 
would be impossible to explain the fact that in the last fifteen 
years the deposits of the national banks alone in the United 



LOAN FUND CAPITAL 349 

These funds may, a few years hence, be half as great or, 
possibly, twice as great, without implying any slightest 
corresponding change in the total volume of existing social 
wealth. Bank funds do, in fact, change greatly from season 
to season ; but there is no reason to suspect that concrete 
capital is undergoing any similar change in volume. In 
fact, also, the loans of banks are sought and granted in large 
part for the financing of production which is later to take 
place. The deposit credits derived from these loans expand 
and contract in conformity with the volume of forthcoming 
product rather than with the volume of existing wealth. 

It must no doubt be admitted — it is, indeed, to be asserted 
and emphasized — that the banks do sometimes expand and 
sometimes contract the volume of circulating media. If, 
then, it be objected that there is nothing in their activity 
which tends to increase the supply of present wealth for sale 
against future wealth — that because the banks do not 
affect the volume of social wealth, their extensions of credit 
must be merely a redistribution of purchasing power in 
society and not an increase either of it or of the goods to 
be purchased with it — that the working of their expansions 
of currency must in the long run be effective, not to change 
the total volume ©f purchasing power in society, but only 
to change the volume of units, and therefore the purchasing 
power of each unit, the final effect being solely upon the 
level of prices rather than upon the rate of interest — all 
this may readily be admitted without menace to the argu- 
ment. It remains true that the activity of the banks in 
modifying the supply of loan fund is always a controlling 
influence in fixing or in modifying the interest rate of any 
particular time.^ 

^ Banking and Interest. 

The long-time effects of banking upon the interest rate are not 
a part of the present problem, but are nevertheless questions 
both of great importance and of great difficulty. Why should 
not the effect of the expansion of currency by the bankers be 
precisely the same as the effect of any other inflation of the cur- 
rency, viz. (1) easier loans and lower discount rates, followed by 
(2) risiug prices and stimulated demand from borrowers, neces- 
sitating (3) a recovery in discount rates possibly extending even 



350 THE ECONOMICS OF ENTERPRISE 

We have seen that the thing loaned in the interest relation 
is money, or other purchasing power interchangeable with 
money; that interest is a premium for present dollars over 
future dollars ; that the problem of the fixation of the rate is 
merely one more problem in the mechanics of price fixation — 
the only aspect in which the interest problem is peculiar being 

beyond the original level, and resulting finally in (4) the old level 
of interest at a higher level of prices. 

There appear, however, to be differences between the working 
of credit expansion and of money expansion. Credit expansion, 
initiated by the banks themselves rather than by the original stimu- 
lus of expanding supplies of reserves, takes place only on terms of 
an increasing pressure upon the banking reserves and on terms or 
a tendency toward progressively higher discount rates for these 
bankers' services in the underwriting of credit. In other words, 
the increase in the current circulating medium, as more and more 
future paying power is being transferred by the banks into present 
and current paying power, takes place on terms of the increasing 
resistance of hardening bank rates — higher premiums for present 
funds as against future funds. The funds derived from these dis- 
count transactions function as currency to be loaned by the bank 
depositor or to be used in the purchase of goods. Prices tend to 
rise, to be sure, but only under the increasing opposition of 
higher interest rates. The loan fund is expanding, but is ex- 
panding as a result of a process which carries with it higher 
interest charges. 

It must be admitted, however, that the foregoing may well 
be a faulty analysis. The precise relations of banking to the long- 
time average of interest rates, and therewith to the long-time aver- 
age of prices, are problems of infinite difficulty and perplexity. 
Of only so much as this — which is enough for the present purpose 
— is the present writer confident : that the problem of the supply 
of loan fund and of the interest rates paid for loans is, for any given 
time and situation, rather a banking problem, a question of the 
volume of circulating medium and the uses for which it is offered, 
than a question of the aggregate wealth of society, of the source 
or nature of it, or of the abstinences conditioning the existence of 
any part of it. Long-time equilibria are no part of the prob- 
lem of the current supply of funds or of the current interest 
rates. 

Likewise it cannot greatly matter whether the following analysis 
of the relations between banking and the long-time levels of interest 
is or is not accurate ; it is merely offered by the way as the best 
that the present writer can at present accomplish • 



LOAN FUND CAPITAL 351 

the fact that the equating point between the demand and 
supply schedules is a rate per cent ; that therefore the analysis 
of interest leads back to an examination of the precise thing 
that is lent for interest and to an examination of the influences 
lying behind the demand for it and the supply of it ; that the 
supply of loan fund is merely the supply of present purchas- 
ing power available for lending ; that this loan fund is there- 
Banking is essentially an underwriting of credit. The customer 
of the bank becomes a debtor to it in order to obtain with it an 
immediate credit which he can use as current buying or paying 
power. He exchanges obligations with the bank. He owes it 
in order that he may be able, by assigning his right against it, to 
be the debtor of it rather than a debtor to another — to substitute 
it as debtor for himself as debtor. Essentially the bank takes 
his liability upon itself on terms of his becoming separately liable 
to it. In point of form, doubtless, the bank does not precisely 
become his surety or make itself a guarantor of his promise, but 
essentially it does exactly this ; it assumes his debts on terms of 
his becoming indebted to it. Thus he ceases to pay interest to 
other creditors and pays interest to the bank instead as his creditor. 
It has intimate knowledge of his business affairs and accepts the 
risk of his solvency — a risk which others will either not accept 
at all, or will accept on less favorable terms. 

And incidentally the bank does more than this : it transforms 
the future paying power of its customer into present current paying 
power. This is the function of reserves. Based upon these it is 
able to promise that it will pay actual money in those exceptional 
cases where actual money is called for. For each dollar of bank 
reserves the banks are able to transform, say, $4 of customers' 
probable future paying power into an equal sum of effective pres- 
ent paying power. 

But note that these reserves do not mean that the bank expects 
to pay in money or will have to pay, but only that it will be ready 
if it be called upon. Ordinarily it is not so called upon. Actually 
most of its obligations represented in its deposit liability, and the 
average of these, are long-time obligations. Commonly they come 
be canceled neither earlier nor later in money, but only by the 
debtor presenting them to be set off against his note for the cancel- 
ing of it. 

In substance, then, the discount charge of the bank is an insur- 
ance premium for the danger of loss which it accepts in substituting 
itself as debtor in place of the borrower and in undertaking, if 
necessary, to pay on demand in his stead. If his obligation to 
it is also to pay on demand, the premium rate is likely to be 
a low one. If he is privileged to delay, the while that the bank 



352 THE ECONOMICS OF ENTERPRISE 

fore made up exclusively of rights of purchase — rights of 
control or direction of men and of wealth ; that its existence 
implies nothing as to its origin or as to the manner or method 
of its acquirement ; that as the banks create it by the exercise 
of their guarantee function, so other men may extort or steal 
it ; or it may arise through the legislative gift to one man of 
enforceable rights against other men ; or the possessor may 
have obtained it by ruse or guile — it mattering for the pur- 
pose only that it exists and is transferable to borrowers ; 
that the loan fund, as made up of income-earning possessions, 
is capital, but a peculiar kind of capital, one among many 
varieties, and entirely distinct from durable production on 
durable consumption goods or from the raw materials of in- 
takes the risk of not being permitted to delay, tlie premium is 
higher. 

It being, then, established that the discount rates of banks are 
a compound of (1) risk charges against possible bad loans (specific 
mortality hazards), (2) overhead and general charges for the risks 
of stress or crisis (conflagration or epidemic hazards), (3) charges 
for the cost of maintaining reserves and for the general expenses 
of administration (expense loading) — it should follow that bank- 
ing can have no very important bearing on the long-time level of 
interest rates. The banks serve as mere intermediaries between 
the debtor class and the creditor class. As incidental to their 
function of suretyship — of the underwriting of credit — they 
provide a circulating medium and thereby affect the general level 
of prices. In the long run their activity will mostly exhaust itself 
in this modification of prices. 

Some effect, however, there is in banking to lower the interest 
rate — the gross rate, the rate inclusive of the risk charge. This 
effect is, indeed, implied in the very nature of the banking func- 
tion, the underwriting of credit risks. That the performance of 
the intermediate function makes possible a larger number of credit 
relations through bringing together more lenders and borrowers, 
does not involve the necessity of a change in the rates of interest 
paid. It is in the diminishing costs of the carrying of the credit 
risks that the banks are able to make the interest rate lower. Gains 
in the business of insuring credits arise by the fact that the insurer 
is able to carry risks more cheaply than the individual lender can 
carry them. The gain is a differential between the cost of the risk 
and the market compensation allowed for carrying it. Only in 
respect, then, of diminishing the risk element of the rate — but 
very clearly in this respect — has banking any influence to lower 
the long-time market rates for loans. 



LOAN FUND CAPITAL 353 

dustry — a kind of capital also that has no direct dependence 
on the supply of production goods or of other concrete wealth 
in society, or even any necessary relation to any of them ; 
but that this loan-fund subdivision of capital is the only 
capital known to the distinctly financial world, the thing 
that is lent and borrowed in the capital markets, and the 
thing which, in getting transferred from lender to borrower, 
fixes the rate, or rates, of interest with which the business 
world is familiar ; and that the main business of banking is in 
the creating or the lending of it. 

Devoting itself especially to an examination of interest 
theory, the next chapter will make clear that abstinence can 
be offered as an explanation for interest only in the sense of 
pointing to the conditions on which a part of the supply of 
income available for future uses depends ; that, as an ethical 
justification for interest, abstinence is unimportant, and even 
irrelevant ; that no matter from what source or by what 
method the incomes may have been gained, the question 
of abstinence has solely to do with what present disposition 
shall be made of the incomes ; that abstinence is in no case 
a fact of pain ; and that even if in all cases, or in any, it 
were a pain, the abstinences of different men could not be 
reduced to any common denominator of pain, with the units 
of which the units of interest income could be made propor- 
tional. 

It will also appear that, since the interest contract is always 
a contract for the deferred payment of money, interest must 
express the market rates of premium for the present funds 
offered by lenders over the future funds promised by 
borrowers ; that all influences — banking as well as absti- 
nence — increasing or limiting the supply of funds for loan 
must be considered on the supply side of the case ; that all 
the various opportunities and inducements to borrowing 
must be considered on the demand side — agriculture, manu- 
facturing, merchandising, speculation, wise consumption 
loans, unwise consumption loans, the purchase or hiring of 
long-time production or of long-time consumption goods, the 
jQnancing of enterprises of predation or of other harm, as well 
as enterprises of social service — adulterated goods equally 
with wholesome products, scandal equally with news, cut- 
throat competition equally with wholesome rivalry, pur- 
chased legislative favor equally with up-to-date equipment. 
2a 



354 THE ECONOMICS OF ENTERPRISE 

Every prospect of gain from borrowed funds affords an in- 
centive for borrowing them. Incidentally the social-organ- 
ism method of explaining interest rates will come in for 
some discussion ; so also of the relation of existing valu- 
able properties to the demand for funds. 



CHAPTER XIX 

THE LOAN RATE : INTEREST 

Production, exchange, and currency. — In view of the 
work that is done in the home by members of the family, 
and of the products that are directly consumed by the pro,- 
ducers of them, it will not do to assert that all goods in the 
present society are produced for sale, but only that, in the 
competitive order, production for sale is the characteristic 
fact of that order and the fact about which most economic 
problems center. More and more the baking, the laundering, 
and the making of fabrics and garments are coming to be 
done outside the household. The field of exchange and of 
production for exchange grows constantly wider. The 
modern economy is prevailingly the exchange economy. 

Incomes, a monetary (currency) movement. — It is ob- 
vious that an exchange economy means that each individ- 
ual is producing some commodity, or performing some 
present service, or contriving some scheme or project, by 
which money (more accurately, currency) shall be obtained 
by him, to the end that in turn, he may have it to pay out 
in the furthering of his purposes. Thus for each individual 
and for individuals in the aggregate it is possible to regard 
the economic process as one of a constant circulation of money 
— all incomes arriving in money terms and all expenditure 
of income taking place in money terms. While each indi- 
vidual is doing that thing which will best gain him money, 
and gains the money by doing that thing, it is still true 
that what thing will best gain him money depends on what the 
possessors of money are disposed to pay him for. This- 
statement is merely another way of saying that it is every- 
where demand that gives direction to supply. Each indi- 
vidual does what another will give up money for. Each 

355 



356 THE ECONOMICS OF ENTERPRISE 

recipient of money is in turn in position to determine what 
some one else shall do or how he shall employ his possessions. 

Loans a temporary modification of the money flow. — 
The usual process of lending is, then, merely one of sub- 
tracting from one man's store of cash resources and of adding 
to the store of another. This substitution of control may, 
it is true, take place through the transfer of some item of 
property controlling a stream of money income or exempting 
the holder from the necessity of paying out money. In 
other words, the renting contract is always possible. More 
commonly, however, the transfer is a transfer of money or 
of other purchasing power as substitute for money. Such 
cases present the deferred payment relation and the interest 
contract. The interest problem, therefore, is the problem 
of explaining the terms of price payment, the rate per dollar 
per period, on which these transfers of purchasing power are 
made. 

Interest paid to modify the money flow. — Such payments 
are evidently made for the privilege of earlier as against 
later command of purchasing power — some of them with 
the purpose of buying or hiring instrumental goods or fran- 
chises or patents, or of obtaining raw materials in the pro- 
ductive process ; others for speculative operations ; others 
for the purchase of long-time consumption goods; others, 
again, for the purchase of immediate consumption goods; 
still others for the discharge of accruing money obligations. 
But in any case interest is the payment for the right to 
have or to use earlier rather than later. 

Sources of circulating media : Rates and prices. — From 
whom shall these rights be obtained ? Obviously from those 
who have them — from the saver rather than from the 
spender, but equally obviously from those who can create 
them at will — the bankers — and from those who, through 
the bankers, are able to transform a prospective paying power 
into a present paying or purchasing power. For note that 
this circulation of purchasing power which we have just 
analyzed, and the transferring of it in loans, must take 
account of the fact that, through the bankers, contributing 
streams of purchasing power are being injected into the gen- 



THE LOAN RATE: INTEREST 357 

eral circulation of currency, and that these banking con- 
tributions vary greatly in volume with different times, and 
vary also in the charges on which they are to be had. Some- 
times, that is, prospective paying power functions as a greater 
and sometimes as a smaller share in the total of present paying 
power, — circulating media, currency. When the banks 
are creating currency generously for their customers, money 
is easy, the loan fund ample, and prices are rising or making 
ready to rise. When the banks are niggardly of credit ac- 
commodations, interest rates advance with the short sup- 
plies of banking currency and of exchange media generally. 
Acute contractions of banking credit so far restrict the 
offer of prospective income as immediate purchasing power, 
and so far reduce the fund of deposit credits, and so far raise 
the rates upon loan capital as to force many holders of 
property to make choice between selling at great sacrifice 
and holding at continuing loss, as to compel debtors to renew 
their obligations, if they can, on increasingly burdensome 
terms, and as to subject many business men to the necessity 
of seeking accommodation at whatever rates they can get 
it in the frantic attempt to escape insolvency. 

Classical abstinence. — In view of the foregoing, the 
attempt of the classical economists to explain the supply 
of loanable capital as dependent solely upon the abstinence 
of lenders, and to interpret interest as a rate of return fixed 
as the equating point between the pains of saving, on the 
side of supply, and the gain or advantage of borrowers, 
on the side of demand, falls little short of the grotesque. 
Still greater is the absurdity when the demand for funds is 
interpreted to indicate or measure the social productivity of 
capital. 

There is, however, truth in the abstinence theory of interest 
only that it is but a part of the truth, and is at the same 
time an exceedingly unfortunate way of expressing that part. 
Men who have purchasing power in hand are evidently able 
to spend it or to invest it. If they lend it to others, they 
get pay for the lending — for foregoing or displacing some 
alternative employment, whether in spending or investing. 
If this is all there is in the abstinence theory of interest, 



358 THE ECONOMICS OF ENTERPRISE 

it is so far axiomatic. And equally beyond question is it 
that the degree in which receivers of income are content 
to forego the spending of it has something to say as to the 
amount of current income which is available for purposes 
of lending — only that it has not everything to say. 

Such truth, then, as there is in the waiting or abstinence 
theory of interest rests merely in the obvious fact that who- 
ever has present wealth or present income has his choice 
between using it for purposes of immediate consumption, 
spending it, and applying it in one way or another to future 
uses, investing it. In order to hold these alternatives clearly 
in mind and to avoid the misleading connotations, spending 
and investing will be understood as contrasted terms. Spend- 
ing means using for immediate needs. Investing must, 
therefore, include all outlays for durable production goods, 
e.g., farm machinery, and for all business outlays in general, 
and all outlays for durable consumption goods, e.g., houses, 
pianos, and automobiles, and as well all cases of lending. 
To retain a property which one already has, rather than to 
sell it and spend the proceeds, is a choice in favor of the 
investment alternative. 

Origins — labor or abstinence — irrelevant. — It is, then, 
clear that this decision whether to spend or to invest has 
nothing to do with the origin of the property. Much of 
the existing capital, social as well as private, never had any 
labor or expense as the condition to its existence. Lands, 
waterfalls, and all forms of natural bounty do not owe 
their origin to human effort. Equally obvious is it that 
much capital does not owe its continued existence to any 
sort of saving or providence or abstinence. No one can 
either produce or consume the waterfalls or the water fronts, 
or the city lots. Still other capital that is purely private, 
e.g., patents and franchises, as they need not have been con- 
ditioned in origin upon labor or expense, are not conditioned 
upon any restraint or saving or abstinence for their contin- 
uance. Labor a s explanatioiL o f the o rigin_of capital ^nd 
abstinenc ^_as_je2Qlanation_oLJts^^ exis tence afe 

equally inadequate doctrines. Waiting which took place 
in the past has nothing to do with the present situation 



THE LOAN RATE: INTEREST 359 

excepting in so far as this waiting may or may not explain 
what there is now in existence to save or to spend. In 
point of fact, also, any particular holder of any particular 
item of income or of capital may have obtained it by gift, 
by inheritance, by legislative grant, by speculation, by theft, 
or even by highway robbery. Some of this capital, indeed, 
legislative favor may have created de novo, e.g., tariff privi- 
leges, franchises, patents, monopolies. It being, however, 
entirely clear that the origins of income and of capital have 
little to do with the rates of interest that are to be had for 
them, it cannot greatly matter whether there is much or 
little truth in the labor theory of the origin of capital or in 
the abstinence theory of the maintenance of capital. Not 
where things came from but what can be had for them is the 
interest problem. 

Thus it is clear that there is some capital that was never 
produced by human labor, that could never have been de- 
stroyed by the waste or consumption of human beings, that 
does not now depend for its maintenance on the restraint or 
foresight of anybody ; and that there is always a large volume 
of capital funds for loan that are created by banking activity 
as a present derivative from expected future paying power. 
Abstinence, therefore, as explaining the supply of funds for 
loan can mean no more than the obvious fact that whoever 
lends abstains from making some alternative use, that who- 
ever has money might spend it, that whoever has lands might 
sell them or might cultivate them himself. 

But abstinence is a reality. — It is, however, still true that some 
part of the funds for loan in society is due to the choice of the 
possessor to invest them rather than to spend them, and that 
some part of the increase in the supply of loan fund is conditioned 
on the fact of saving. The overcoming of the disposition to spend 
is necessary to some of the saving; some waiting takes place as 
induced by the pay which can be had for it. Clearly, then, there 
is truth in the abstinence theory of interest, only, be it repeated, 
it is not the whole truth. 

How far waiting is burdensome. — It is, however, commonly 
asserted that always with human beings there is a disposition to 
spend rather than to hold — an indisposition to save, to wait, to 



360 THE ECONOMICS OF ENTERPRISE 

postpone the expenditure of income, to forego present consumption 
in favor of future consumption. 

This dishke of waiting, this protest at abstinence, this impatience 
fact, is commonly presented as the ultimate explanation for the 
limited supply of capital for loan, for the necessity of paying a 
premium of the present over the future if capital is to be borrowed. 
And it is evident that the_indis position to -am t , the j^ressttfe-for 
prRSPnt ^TTJnyment, the impatience ni-^-d^lftv, i s a cnrnmonp lace 
^ct in human life,^ One dislikes to wait about, after the appointed 
time, for some careless friend to fulfill his engagement ; accurately, 
however, is this really the dislike of delay or the desire to do some- 
thing else? But at any rate there are many men who are spend- 
thrift of present resources in their disregard of the claims of the 
future — in their overemphasis upon the present end, or in their 
over-response to the present desire. Are we not all of us a little 
so? Children cry at having to wait for their cake till the next 
meal, when they will he hungrier. Savages are prone to feast 
wastefully to-day, careless of the probable or certain dearth of a 
fortnight hence. In varying degree, are we not all like this? 

So it is commonly thought and said — especially by economists. 
And surely many men are grossly improvident of health and wel- 
fare as well as of income. The far-off need, the remote dyspepsia, 
the possible nervous breakdown, the probable rheumatism, the 
certain remorse, or even the untimely death — all of us are prone, 
some of the time, to forget. The future fact we are not hkely to 
appreciate adequately, to see clearly, to face fully. 

Doubtless this is more or less true with all races and grades of 
men. And yet what does it mean that so many men are so keen 
to die rich, that so many others are founding rich families, that there 
is so much provision against old age, so many of us hag-ridden in 
our fear of want or possible penury or dependence? Why all this 
piling up of wealth? Is there not also with us the squirrel urge 
toward the hoard of nuts, the ant-like instinct of preparation 
against the November winds ? Have not all of us — or almost 
all — a joy in the mere fact of present provision, a substantive 
pleasure in looking forward to the time of enjoyment, a capacity 
for experiencing those pleasures of hope the enchantment of which 
distance rather magnifies than diminishes? Who knows, after all, 
that our care for old age or our solicitude for the rainy day, the 
parental love for offspring and descendants, the human interest 
in the future of the race, the recognized privilege and accepted 
duty of conserving the public resources may not in the large 
average outweigh the impulse to present enjoyment? Is it 



THE LOAN RATE: INTEREST 361 

certain that less saving would go on were there no interest rate? 
Might not the present premium against future need or future 
contingencies in general be all the greater if the earning power of 
a given fund were less? 

The issue at its simplest. — To isolate this problem and to place 
it clearly before us, recourse must be had to a more or less heroic 
abstraction : Suppose a competitive society in which the only 
productive fact were labor — all lands equally good and plenty of 
them, no use made of implements or of durable consumption goods, 
no occasion for seed or fertilizers, the wild beasts caught by running 
them down, the fish scooped up in the hands. There would still 
exist exchange relations among products — there might even be 
money — but there would not need be any premium in favor of 
present goods or present purchasing power as over against future 
goods or future purchasing power. There might or there might 
not be this premium, according to the prevailing psychology 
with regard to provision for the future. Even a negative interest — 
a charge for keeping, a premium oh the future — might attach. 
The perspective of time alone does not, then, for all kinds and con- 
ditions of men, guarantee an interest rate. Nor is our knowledge 
of present humanity sufficient to warrant us in any opinion about 
our own particular race or society in this regard. 

Abstinence in the pain interpretation. — Something, then, is 
the matter with the notion that interest finds its explanation in 
the pains of abstinence generally, or in the pains of marginal absti- 
nence. 

As a matter of fact, abstinence is not necessarily or always a' 
pain at all. For some people the pleasures of expectation are a 
reality ; and there are, for misers at least, some keen pleasures of 
having and keeping. And in the very common case in which money 
gives a choice between two gratifications, one present and the other 
future, it would be a waste of sympathy to count as pain the fact 
that the greater pleasure lies in the future. The truth obviously is 
that to choose between two present gratifications does not fall 
within the pain calculus : and to find in the remoter of the two the 
larger pleasure or service introduces no new element of pain. Nor 
is the going without the gain of using your tools or machinery for 
a year, in order to rent them, a fact of pain. At the most, it is a 
foregone pleasure. Rental incomes from land are, at all events, 
not based on pains. We waste no tears over the piteous case either 
of the landed class or of the coupon cutters. 

Nor, in truth, where the individual is in possession of sufficient 
money to buy him a meal, but decides to save his money and to 



362 THE ECONOMICS OF ENTERPRISE 

lend it, is the abstinence a pain. It is only the hunger that is pain. 
A man having the hunger but no money has unquestionably one 
pain and no more, that of hunger. So much is clear. If now we 
take this man to have both the hunger and the money, he has not 
now two pains, one of hunger and one of abstinence, but only the 
one original pain of hunger. His is, indeed, the fortunate case of 
one who need have no pain at all if only he would let go of his 
money. Perhaps to lose his money would be painful, but only in 
the sense that it would involve the continuance of the pain of 
hunger. But to lend the money is not a pain, and the only pain 
in the case is that gnawing at his vitals that he has declined to still. 
To keep your money when you are hungry is clearly not a pain, 
but only being hungry. Were tliis not the truth, the case of one 
having both the hunger and the money would be the especially 
grievous case ; alms given to the beggar would carry with them the 
least pain when given just before meal-time ; the rich who could 
spend, but do not, would be the unfortunates of the world; the 
last word or economic philosophy would run, " Blessed be nothing." 
The truth certainly is that the man with the hunger and the dollar, 
who now stills his present hunger, will shortly get hungry again. 
The dollar is merely his permit to choose between two pains — or 
two pleasures — one present and one future. If he had no dollar, 
he would have to bear both pains or go without both pleasures. 
There is nothing especially touching, then, in the fact that he has 
the dollar, and that, in spending it now or later, he has to forego 
an alternative spending. It appears, then, that not only the neces- 
sity of a choice between pleasures is not a pain, but also, and with 
equal certainty, that the necessity of a choice between pains is not 
a pain. 

The abstinence doctrine, rightly interpreted, a truism. — 

The doctrine, however, which asserts merely that the growth 
of the loan fund is dependent in part upon the disposition of 
possessors of resources to retain them for future needs rather 
than to spend them for immediate needs is true — to the 
extent of being a truism. And it is true also that the amount 
of income saved will in part depend upon the degree of pres- 
sure from present need. All investment is a foregoing of a 
present opportunity for consumption. If one has present 
money (currency), he may (1) spend, (2) hold for later spend- 
ing, (3) buy durable production goods for his own use, (4) or 
for lending to some one else, (5) buy durable consumption 



THE LOAN RATE: INTEREST 363 

goods for his own use, (6) or for lending to some else, or (7) 
lend the money to some one else to be applied in any of the 
foregoing six ways. The supply of loan fund at any given 
time must obviously be somewhat affected by the way in 
which the possessors of immediate purchasing power are 
disposed to use it. All later services are conditioned on the 
displacement of earlier services. When one stores ice against 
the summer's heat, or wood against the winter's cOjld, or food 
against the foodless season, or wages against the weeks of 
sickness or the feebleness of age, the fact may well be — and 
commonly is — that the future need outranks the present 
need, pound against pound, or bushel against bushel, or dollar 
against dollar, without reference to any increase in the objec- 
tive goods with lapse of time. There is no abstinence or 
burden in the case in any other sense than that either ap- 
plication must displace the other. The line between con- 
suming and saving (spending and investing) is drawn at the 
point of equality between two opposing attractions. For 
each individual, consumption (spending) stops and saving 
(investment) begins, whether in long-time consumption 
goods or in production goods or in other directions, where 
the advantages from saving, whatever these advantages may 
be, make an appeal strong enough to displace present con- 
sumption. The choice must always lie between postponed 
services and present services, one thing as against the other 
thing, the future against the present. Abstinence in this 
sense there must always be, wherever there exists a sum of 
present power to be allotted in either of two directions — 
some recognized future need outranking any present need. 
If one does not spend, he must invest in one way or another. 
But there is no necessity of pain anywhere in the case. And 
if there is pain, it is the pain which goes with the fact that a 
present want remains unappeased and not in the pain of pro- 
vision against some future want. Abstinence, then, there 
always is behind every item of loan fund, so far as it is true 
that the loan fund really depends upon saving. But with 
that part of the loan fund created by banks there is no room 
for any antecedent saving. The customer of the bank has no 
present purchasing power until the bank intervenes in his 



364 THE ECONOMICS OF ENTERPRISE 

behalf and renders his future paying power over into present 
currency. 

Individual saving. — The simpler aspects of the savings 
problem are easily analyzed. Assume, for example, that the 
income of a particular individual in actual society depends 
upon dividends derived from an earlier investment in stocks, 
and that no personal productivity enters into the problem. 
In this case the line between present and deferred service is 
easy to draw for the ideally reasonable man, though hard to 
draw for any actual man. Nevertheless, it must in any case 
be somehow drawn, and will be drawn at the margin where 
present needs and future needs are at equal appreciation in 
the present comparison. 

Prospective changes in income. — If, however, allowance 
must be made for an expected change in the dividends, the 
margin must somewhat shift. If the next year's return is 
likely to be scant, some portion of this year's funds will 
reasonably be held over to the next year. It would, in such 
case, be admissible to lend, if necessary, some of this year's 
funds without interest, or even at some loss in the principal 
sum. A low interest rate, or even a negative rate, might 
be accepted. In view of the prospective scant supply, and 
thus of the changing relation of the objective goods to the 
individual's desire — in view, that is, of the rising utility 
of funds with passing time — the subjective phenomena of 
interest are all present. In the mere fact of a relative future 
scarcity, there is interest sufficient to dispense with the neces- 
sity of any objective increase in the fund. If, however, 
the next year's income promises to be relatively abundant, 
the exchange relations of present funds against future funds 
will be greatly in favor of the present; a high interest rate 
on borrowed funds would readily be paid — perhaps 200 of 
that time for 100 of the present time. Rationally, all de- 
pends on the relative provisionment. Actually, in any case, 
the line will be drawn where the present appreciation of the 
future good makes equal appeal with the present good. 

Uncertainty of later income. — And evidently the larger 
the uncertainty f 3 to the amount of the next year's dividend, 



THE LOAN RATE: INTEREST 365 

or the greater the doubt whether there will be any dividend 
at all, the stronger is the influence to limit the consumption 
in the present and thus to lower the rate of premium at which 
the individual will consent to exchange present funds against 
future funds. 

Changing needs. — So far, the analysis has taken the 
individual's aggregate of needs to be practically constant. 
If, however, while the income is stable, the needs of the future 
promise to be relatively great, e.g., by sickness, or more 
children, or old age, the demand of the present will weaken 
relatively, provision for the future will tend to be more gen- 
erous, and lending will be considered at a lower rate of in- 
terest premium. On the other hand, any especial urgency 
of present needs relatively to future needs will call for high 
rates, if the individual is to lend, or will justify high rates of 
payment if the individual is to borrow. 

Personal earning power : changes. — But it is with the 
introduction of personal earning power and of changes in 
this earning power, taken in connection with the introduction 
of the changing earning power of the individual's possessions, 
that the analysis becomes especially complicated. 

The difficulties are, however, not great when allowance 
is to be made solely for the existence of personal earning 
power, or for changes in this earning power, or for changes 
in the stress and strain and pain of putting it forth. Other 
things remaining equal, the prospect of increasing earning 
power will lower the necessity of provision for the future 
out of the present, will allow a larger immediate consumption 
of present product, will make higher the rate of premium if 
the individual is to lend, and will make higher the premium 
that he will offer if he is disposed to borrow — that is, will 
raise the interest rate, the premium of present over future. 
The prospect of a diminishing personal earning power, other 
things remaining equal, will reverse all this : saving will be 
more urgent, lending more attractive, minimum interest 
terms lower. 

The marginal adjustment. — How far, then, in the actually 
existing competitive society, shall any one-; man — say Mr. 



366 THE ECONOMICS OF ENTERPRISE 

Rockefeller — direct his v/ealth to present consumption, 
and how far allot it to future uses ? It is not to the purpose 
to point out that Mr. Rockefeller could not possibly con- 
sume all his wealth, or even the income from all of it — that, 
as to the larger share of it, no sacrifice can be involved in 
the postponed use. There is still some part of his wealth, 
however small, that he can consume if he will, and can re- 
frain from consuming if he choose. With him, as with 
other men, there is a line of choice, a margin, at which present 
use and future use are of equal attractiveness. He may 
spend dollars or millions ; but he could spend more or less 
accordingly as he appraises the relative attractiveness of 
the alternative applications of his wealth. There are gifts 
to be made now and gifts to be made in the future. Within 
his field of solicitude are the existing Rockefellers and other 
existing needy human beings, and there will be further gen- 
erations of Rockefellers as well as of the future race at large. 
There is, then, for him a margin of displacement between 
present uses and future uses. In this sense, but in no sense 
of pain, he has a marginal " abstinence " which is the point 
of limitation upon his saving. 

Factors in the adjustment. — But now note that there are 
open to him three different lines of saving : (1) durable con- 
sumption goods, — houses, yachts, parks, pianos, tennis 
rackets ; (2) gain-rendering goods, — securities, factories, 
refineries, railroads, mines, etc. ; (3) loans to other men who 
have, like him, their individual choices between present and 
future uses and the same three different directions of future 
use. Rationally, Mr. Rockefeller's whole store of present 
wealth, as an aggregate supply, must be apportioned among 
these four demands — the demand for present consumption 
being included — according to the principle of maximum 
utility, no one use being permitted to displace a more im- 
portant use. 

The aggregate loan supply. — It is evident, then, that, so far as 
the loan fund at any given time is made up from diverting present 
income to providing income for future needs, there is for each 
different man an abstinence limitation upon the funds that he allots 
to future uses. And equally evident is it that at any particular 



THE LOAN RATE: INTEREST 367 

time there is a limit to the supply of immediate funds derivative 
from the future paying power which the bankers, through their 
guarantee function, are making effective as present paying power. 
This limit is a cost limit — the indemnity necessary to enlist the 
activity of the bankers in assuming not only the risks of the process, 
but also the expense of providing reserves and, in addition, the 
charges for administrative expense. 

Equally evident is it that the share of funds which any indi- 
vidual refrains from spending and sets aside for investment will 
depend in part upon the rate of the advantage in prospect. The 
point of indifference between spending and investing is a different 
point with every change in resources, in present needs, in prospec- 
tive needs, and in the rate of gain which may be secured from invest- 
ment. So, again, the volume of funds which the different banks 
will create will depend in part upon the compensations which are 
offered them for extending their activities of guarantee. There is, 
therefore, no such thing as explaining the supply of investment 
funds unless with constant reference to the rate of return that is 
open. In other words, the rate of interest upon any particular 
class of funds is not determined by the abstinence rates of the 
investors, or by the cost rates of the bankers, but is merely the 
point of equation between the costs of supply and the gains of de- 
mand. Nowhere, indeed, either in the interest problem or else- 
where, is the market adjustment dependent solely on the supply 
side of the market equation. Nor would especial emphasis upon 
this point be necessary in the interest analysis, were it not true 
that interest is often interpreted as fixed by the degree of protest 
against abstinence, as purely a matter of the relative emphasis 
on present consumxption as against future consumption. The truth 
is that the supply of funds is not exclusively determined by the absti- 
nence principle, and that even were the supply so determined, the 
returns upon investment would have much to say as to the extent 
to which present consumption would be limited. So far as savings 
are the source of loan fund, there must be recognized for each 
individual Ms own particular marginal abstinence, a final item of 
supply at which the attractions of spending and of saving are 
equated. Every man is, for some of his saving, a marginal saver — 
has, that is to say, a marginal abstinence. But where this margin 
is drawn is as much a question of the advantages to be derived from 
saving as it is a question of the pressure of present need.^ 

^ The foregoing statement holds good even though it be true 
that, on the side of provision for future income, falling interest 



368 THE ECONOMICS OF ENTERPRISE 

Savings, gain and interest rates. — What is, in fact, the 
precise bearing of the individual's opportunity to employ 
gainfully his wealth with passing time — to reap an incre- 
ment with the time-use? The very terms of the problem 
imply a diminished share of present money income allotted to 
present spending, and a more than corresponding increase in 
the prospective future supply. How far, then, does the pro- 
ductivity of wealth in time affect the interest rate ? 

Obviously, the interest rate must be affected. The incre- 
ment can be had only on terms of restricting somewhat the 
present consumption. This restriction raises for him the 
marginal utility of the present wealth or of the present pur- 
chasing power. On the other hand, the promised increase 
in future provisionment diminishes the marginal utility of 
future wealth or of future purchasing power. Put into terms 
of the familiar categories, this promise of increment with 
passing time is an increase in the demand for present funds, 
to be followed by an increase in the supply of future income. 
Gainful uses play, then, a distinct and important role in the 
making up of the total demand for present wealth. In its 
bearing upon the present need, the gainful use is like a present 
sickness or the birth of a child. It presses against the total 
of resources; it starves the other needs; it increases the 
marginal significance of wealth either for present consump- 
tion or for investment, at the same time that it increases 
the marginal sacrifice of postponing goods to future uses. 
Therefore, of itself, and purely as a present influence, it 
must tend to raise the postponement charge. 

But it does more : By the attendant promised addition 
to future income, its influence is to reduce the marginal signifi- 
cance of future wealth or of future purchasing power. Here 
is, therefore, to be recognized a second and distinct influence 
to raise the relative importance of the present over the future 
and to increase the interest rate. 

Or to put the case in another way : Out of the individual's 

rates themselves impose the necessity of larger funds in order to 
provide a given fixed return. It is not incredible that, on the 
whole, falling interest stimulates saving, despite the weakening 
appeal of the direct motive of gain. 



THE LOAN RATE: INTEREST 369 

total supply of goods, present and future, some part can go 
for present needs, some part can be directed to future needs. 
What part of the goods available to the present will be al- 
lotted to the present ? So far as the present goods are alone 
concerned, the problem is one of distributing these present 
resources according to the principle of maximum utility as 
recognized in the present time. But it is, in fact, a distribu- 
tion which must take account of many goods that do not 
yet exist. Those goods which are not yet, but may come to 
be, through the sacrifice of some of the present uses of exist- 
ing goods, are among the influences bearing upon the distri- 
bution of the present goods to limit the supply of those al- 
lotted to present consumption. The existence of earning 
power with time must, therefore, bring about for the indi- 
vidual a higher postponement charge, irrespective of the 
promised attendant increase in the supply of future goods as 
a force affecting the utility of the future goods. Therefore, 
when the saved wealth goes to uses controlling increments 
in time, there is a distinct influence to be recognized as bear- 
ing upon the marginal utility of future wealth and, there- 
fore, upon the relative marginal utility of present wealth 
as against future wealth, and, therefore, upon the interest 
rates indicative of the terms of exchange between present 
purchasing power and future purchasing power. 

Interest not mere perspective. — The fact clearly is that 
the earning power of wealth in time has great significance for 
the rates that will be paid for the present control of purchas- 
ing power. The rate is not purely the expression of a " pref- 
erence for early enjoyable income over late enjoyable in- 
come," ^ and of the degree in which future consumables suffer 
in present estimation as against present consumables. This 
may be clear by a simple illustration : Suppose that to-day 
all present needs and desires for immediate consumption 
have been fully satisfied — a situation in which, by the terms 
of the assumption, there can be neither any " prospective 
underestimation" of the future nor any degree of inadequacy 
in " present provision," — there being in fact no unsatisfied 
desires for present consumption, but only a clear apprecia- 

1 The Rate of Interest, Irving Fisher, Macmillan, 1908, p. 80. 
2b 



370 THE ECONOMICS OF ENTERPRISE 

tion of to-morrow's needs. If, now, it be discovered that 
for each unit of the existing wealth there may by to-morrow 
be derived two units for to-morrow's consumption, it is clear 
that there will set in forthwith a vigorous bidding for the 
currency with which to control the present facts offering a 
command of to-morrow's consumable goods, and that there 
must result an interest rate approximating 100 per cent 
per day, payable at the end of the loan period. And it is 
equally clear that no one can need the present consum- 
able goods unless to keep them till to-morrow. The doc- 
trine that interest resolves itself always into a perspective 
between present consumable income and future consumable 
income will evidently not hold. Rather must it be true 
that the mere presence of gain-rendering goods will always 
in a competitive and pecuniary society immediately attach 
an interest rate to money loans or to loans of purchasing 
power expressed in money. All that needs be assumed 
is that the level of prices shall not change. All goods con- 
trolling an increment of future goods must therewith control 
an increment of price.^ 

1 Abstinence. 

The abstinence, or impatience, theories of interest are several 
in emphasis or in aspect — regarding interest. 

(I) As one sort of reward for waiting. 

(II) As the reward for waiting in general. 

(III) As the reward for the abstinence represented in the exist- 
ence of non-land wealth. 

(IV) As a reward fixed and determined by the degree of pain 
or abstinence in the marginal waiting and proportional 
to it. 

(V) As a reward morally justified by the burdens of waiting. 

(I) It must be obvious that whoever pays me for my loan to 
him of suspended purchasing power pays me for foregoing that 
next best use of the purchasing power which is open to me, whether 
for consumption, or for employment in my own business, or for 
lending to some third person, or for holding in the bank or safe or 
cellar awaiting my later direction or use. If this is all that is meant 
by the abstinence doctrine, it is axiomatically true, implying merely 
that the borrower pays the lender for the use of what the lender 
allows the borrower to have. Instead of keeping my own pur- 
chasing power in my own hands and under my own control, I 



THE LOAN RATE: INTEREST 371 

More goods versus more money income. — Recalling, 
however, that gain to the entrepreneur is always gain in 
terms of price, and that gain in terms of an increase in bushels 
or yards or gallons is entirely beside the purpose unless 

allow the borrower to take it and to use it for a specified time for 
his own benefit ; and he pays me interest therefor. 

(II) But there are other modes of lending. I may turn over 
my land to the borrower for a specified time. To lease this land to 
him for rent is to forego my direct use of it. If I had sold him 
the land, allowing the entire purchase price to run for a term at 
interest, he would then be paying me in terms of interest approxi- 
mately the same sum, for precisely the same service, as under the 
alternative payment in the form of rent. This second method, 
the interest method, is, that is to say, merely another form of 
paying for the use of the same thing. 

Rent, therefore, equally with machine hires and with premiums 
for the present control of loan funds, must fall within the category 
of interest in its widest and least technical sense, and must be 
regarded as a reward of "abstinence." The abstinence theory 
in this sense raises, then, only one issue — that of the possibility 
of distinguishing land rent from other rent, and land hires from 
the hires of other instruments. That is to say, the notion of absti- 
nence as the test of capital, and the remuneration for abstinence as 
the test of interest, must rank land as capital and its remuneration 
as interest, and must assign to hires of land and to hires of machines 
one and the same relation to cost of production and to market 
price. 

(III) Interest as the reward for the abstinence represented in non- 
land wealth. In fact, however, interest has more commonly been 
limited to the return upon such wealth as is due to the industry 
of man as distinguished from the bounty of nature. The distinc- 
tion emphasized by this view is purely genetic, pointing to the 
original sources of the wealth that is lent. The test has reference 
solely to differences in origin between items of equipment in the 
productive process. In substance two kinds of rents are set up — 
machine rents and land rents — and only the first of these rents is 
called interest. Interest in one sense land rent unquestionably is, 
being an income from wealth : this view regards the case from the 
standpoint of the investor in land. But the view under examina- 
tion denies that incomes from land are interest, even when the rent 
is expressed as a return per cent upon the value of the land. Nor, 
in this view, can it matter that the purchase price of the land may 
have been saved out of wages or salary or have been derived from 
the sale of a machine ; the investment being now in land, the income 
is regarded not as interest on capital, but as belonging to an entirely 



872 THE ECONOMICS OF ENTERPRISE 

as an intermediate step to gain in price, it is not quite axio- 
matic that the production goods which promise an increase 
of concrete product with passing time must promise also 
an increased aggregate of selling power. Only when the 

separate category, rent on land. And if the income-rendering 
fact is a franchise or a patent right or good will, these, though not 
factors of production in a mechanical or technological sense, are 
somehow conceived to earn interest rather than rent. Not being 
land, how can they earn rent ? And their returns being something, 
what shall they be if not interest ? The current and actual interest 
rates are taken to derive their explanation from the earning powers 
of the non-land items of wealth ; that is to say, the rents of ma- 
chinery and of other non-land properties are invoked to explain the 
interest rate, or the interest rates, on the basis of which the rents 
of land are capitalized into a market value. 

And if the owner of the farm has sold it, with the live stock and 
machinery, on time to the tenant, and, together with this, has ad- 
vanced to the tenant funds saved out of past wages and profits, the 
doctrine under examination would logically be unable to tell 
whether this total of funds is or is not capital, or what part is 
capital, or that any part is capital. This particular type of the 
abstinence theory of capital and interest purports to explain the 
actual rate of interest, through the rents of those factors of pro- 
duction derived from labor. In fact, if funds must be admitted to 
earn interest, the explanation will be offered that they are lent 
to borrowers who invest them in such goods as can earn such in- 
comes as may be called interest. And if it be objected that this 
is to abandon the distinction of origin — to turn from the past 
of source to the future of application — it will be replied that 
this matters only formally — that the interest rate on the funds in- 
vested traces back to the labor-produced appliances of industry, 
and that these other investments in land and in franchises and in 
tax-farming contracts and in Peruna brewing and in Hop-Bitters 
advertising, are somehow not to be bothered about. Interest 
must go back to labor-produced wealth, else it can find no basis 
in an original abstinence : only so, in fact, can capital be held to 
be merely stored-up labor ; only so can all capital outlays be re- 
duced to wage advances upon past labor ; only so can land be 
denied to be capital ; only so can land rent be eliminated from 
cost of production ; only so can prices be fixed by wages and inter- 
est outlays upon marginal land ; only so can either the labor theory 
or the wage theory of value be supported. 

It was, in fact, the necessities of the labor theory of value that 
enforced the abstinence-in-origin theory of interest and the absti- 
nence-in-origin line of distinction between land aid capital. If 



THE LOAN RATE: INTEREST 373 

later product will command more money than the earlier 
product is there room for gain and motive for interest. There 
certainly are cases where the increase in concrete product is 
more than offset by the effect of the increasing supply to 

prices were to be made proportional either to outlays in wages or 
to the pains of labor, it was necessary to find the price-determining 
cost of production where no land cost could enter. Production 
upon marginal land, rentless land, was appealed to for this purpose. 
But it is obvious that there are also capital costs on this marginal 
land. It then became necessary to reduce all these capital costs 
to wages, and by this method to interpret all capital as stored-up 
labor : so viewed, the capitalist is only a laborer gone to seed. 

Thus it came about that wages and interest were conceived as 
causes of value while rent was a result. "Corn is not high because 
rent is paid, but rent is paid because corn is high. ... If the high 
price of corn were the effect and not the cause of rent, prices would 
be proportionally influenced as rents were high or low, and rent 
would be a component part of price." ^ The doctrine is that the 
high wages and the high interest cause the high prices, and the 
high prices cause the high rents : the rents are the result of that of 
which the wages and the interest are the cause. 

But even so, the theoretical structure of classical Economics 
was not complete. The significant aspect of labor as cost must 
lie ultimately in the pains of labor. The problem, therefore, was 
to make prices proportional to the labor pains of production. To 
the employer, truly, the wages and not the pains of the employee 
must rank as costs. And it is evident that prices are directly 
dependent upon employers' costs. So be it : as meeting this 
diificulty, the labor-cost doctrine asserted, out of hand, that the 
wages paid by the entrepreneur for the labor are themselves pro- 
portionate to the laborers' pains incurred in the labor. So much 
being naively but satisfactorily established — values being pro- 
portional to wages and wages to pains — values were declared 
proportional to pains. 

That the positions under criticism are on the whole character- 
istic of existing economic authority will be evident from the fol- 
lowing quotations : 

"The division of labor between those who carry on the suc- 
cessive stages of production conceals the essential nature of their 
operations. A manufacturer spends only a part of his means 
upon hiring laborers directly ; the rest he uses in buying plant and 
materials and in the other expenses of production. But those 

^Ricardo, Political Economy, Gonner's Ed., chap, ii, sec. 29. 



374 THE ECONOMICS OF ENTERPRISE 

depress the price per item. If, however, the exchange power 
of money relatively to commodities in general is not changed 
— if the supply of currency is adequate to maintain stability 

materials were themselves fashioned by laborers to whom another 
set of advances had to be made by a previous capitalist. The 
wholesale or retail merchant hires comparatively few laborers, — 
only a set of clerks and a porter or two. But he recoups by his 
purchases of goods the advances of a long series of preceding em- 
ployers, himself giving only the finishing touches in the whole 
process. Looking at the operations of capitalists and employers 
as a whole, and reflecting on the outcome of the division of labor 
among them and their workmen, we find that all capital is made by 
labor, and all the operations of the capitalist class are resolvable 
into a succession of advances to laborers. . . . Some are made 
from day to day, in the course of current operations. The whole 
of existing capital may thus be described as a great accumulated 
surplus which has been used and is being used for maintaining 
labor, . . ." ^ 

"Not only the creation of capital involves labor and saving; 
its maintenance does so also." ^ 

"Rent forms no part of the expenses of production; that is, it 
forms no part of those expenses of production which affect price. 
It is a differential gain, an excess over and above the total expenses 
of the more fortunate producers. Price is determined by the cost 
of the marginal increment. Rent is not one of the factors bearing 
on price, but is the result of price. It is due to the comparatively 
high price which must be paid to bring out the total supply." ^ 

"By expenses of production we mean the outlays that must be 
made to bring a commodity to market, — what must be paid for 
wages, materials, and the like. Since the materials themselves, are 
made by labor, and the outlays of capitalists are resolvable 
into a succession of advances to laborers, expenses of produc- 
tion in the end are simply wages. By cost of production we 
mean efforts and sacrifices — mainly labor. The distinction 
between expenses and cost — between wages and labor — is an 
obvious one and an important one, though unfortunately not in- 
dicated by any well-established phraseology. In everyday lan- 
guage people mean by 'costs' employer's outlays; and this cur- 
rent usage was accepted in most of what has preceded. In what 
is to follow, it will be helpful to keep these two notions distinct, 
and 'cost' will be used in the sense of labor or effort." * 

"... Expenses of production and cost of production ordi- 
narily run together." ^ 

^Taussig, Principles of Economics, Vol. 1, p. 75. Macmillan, 1911. 
^Ibid., p. 77. Ubid., Vol. 2, p. 56. *Ibid., p. 147. ^Ibid., p. 153. 



THE LOAN RATE: INTEREST 375 

in general prices — it must be clear that an increased num- 
ber of items of product must carry with it an increase in 
the aggregate selling price, if only the price per item has 
not es-pecially suffered. In the general average, therefore, 
more instrumental goods, more equipment, must mean not 
only more products, but a greater total of selling price and 
therewith room for price gain. By assumption — be it re- 
called — the general price situation has not changed. 

"We define private or acquisitive capital as any product of 
human industry that serves as a source of income to individuals. 
It includes: 1. Those forms of social or productive capital that 
are subject to private ownership, and serve as sources of income to 
individuals. Land is not included.^ 

"Profits are neither more nor less than the excess of the selling 
price of the products of industry above the amount advanced as 
wages. It is true that some of the investments of an individual 
capitalist are not made in the form of wages, but in payments 
for materials and machinery which other capitalists have made 
ready for use. But if we look at the relation between capitalists 
as a class, we shall find that the capitalists as a body advance 
wages.2 

But to make the pain proportion complete something had to be 
done with interest costs. Wages and interest together being taken 
to be the price-determining costs, a pain basis must be found for 
the interest as well as for the wages. The famous economist. 
Senior, came to the rescue with the announcement that the pains 
of abstinence lie behind saving and offer a pain basis for the deter- 
mination of interest. 

Time suffices only to indicate what Senior's reasoning im- 
plicitly asserted or assumed : 

1. Not merely that all labor is painful and that the pains of dif- 
ferent laborers are homogeneous for the purposes of comparison 
and, as homogeneous, are reducible to units of pain adapted to 
being set over against units of wage compensation, — 

2. Not merely that abstinence is a pain and that all abstinences 
are homogeneous so as to be reduced to pain units adapted to being 
set over against units of interest compensation, but also, 

3. That labor pain units and abstinence pain units can be made 
homogeneous and so together be set over against the homogeneous 
units of price product and of money compensation. 

^ Bullock, Introduction to the Study of Economics, 3d ed., p. 423. 
^Hadley, Economics, p. 124. 



376 THE ECONOMICS OF ENTERPRISE 

If, then, there are exceptional cases in which the aggre- 
gate price product suffers despite the increase in the num- 
ber of items produced, there must be a still more marked 
gain in price for the remaining industries as an average. 
Failure of price gain to attend a gain in concrete product 
is thereby proved to be exceptional, and basis is established 
for the payment of interest in every case which is not ex- 
ceptional. Therefore funds must bear interest. Invest- 
ment will seek the field in which gain is possible and will 
avoid that relative overproduction which in the exceptional 
case would mean a loss. 

Competitive gain in time affects rate on funds. — It is 
evident that these openings for gainful investment must 
have a direct bearing upon the rate of interest, if for no other 
reason, by the very fact that they help absorb the supply 
of loanable funds ; they offer avenues of investment ; the 
creation of equipment requires the diversion of productive 
power away from the service to immediate consumption. 
Thus, so long as instruments of production are serviceable 
in the increase of product and as services are rendered in 
time and are roughly proportionate to time, time charges 
for the use of wealth appear to be inevitable. Rents are 

(IV) The explanation of interest as somehow connected with 
abstinence has already been shown to contain an element of impor- 
tant truth, if only the notion of abstinence be cleared of all impli- 
cations of pain, the scope of possible abstinence sufficiently wid- 
ened, and the correct relations set up between it and the volume of 
funds offered for loan. 

(V) The discussion already had and the analysis still to follow 
should make entirely clear that there is no relation between the 
income from property and the amount of pain or of deserving in- 
volved either in the getting of the property or in the keeping of it. 
In other words nothing remains of the notion of abstinence as an 
ethical justification of interest. For this purpose, indeed, absti- 
nence has never been supposed to be good for anything wath regard 
to savings in the aggregate or with regard to the intei^est paid upon 
savings as an aggregate, but good only for the marginal fringe 
of cases. But even for the marginal case it is good for nothing. 
The social justification for interest, as for private property in gen- 
eral, must be sought elsewhere and in a different range of consid- 
erations. 



THE LOAN RATE: INTEREST 377 

indeed interest in the broadest and loosest sense of the 
term, but in none the less an ultimate and fundamental 
sense. And as long as rents remain and as consumption 
goods are in exchange relation with equipment goods, a 
time charge must exist both for consumption and for equip- 
ment goods. 

Durable consumption goods affect rate on funds. — And 
precisely the same analysis holds for the relation of durable 
consumption goods to the rate of interest. These goods, 
like durable gain-rendering goods, afford service with pass- 
ing time, and equally with gain-rendering goods, involve 
the displacement of present consumption in favor of later 
consumption or absorb bank-created funds. Long-time 
consmnption goods must, therefore, rank with long-time 
production goods as among the applications of present in- 
come to those future purposes, through the attractiveness 
of which the margin between present use and future use is 
affected. The aggregate of uses of a durable good of either 
sort must rank in the present estimation as high as the pres- 
ent consumption that is displaced, else the durable good will 
not be chosen as against goods for immediate consumption. 
A piano, or a picture, or a dwelling house is as much an invest- 
ment for future income as is a plow, or a farm, or a truck 
wagon or a loom. 

Rents and interest on funds. — Taking it, then, as established 
that the possibility of investing funds in the creation of either 
durable production goods or durable consumption goods tends 
to support or to raise the interest rate, and that the existence of 
opportunities for investment in the development of mines or of 
water powers, or in the amelioration of agricultural lands, or in 
the upkeep of these lands, furnishes a corresponding demand for 
funds and exerts a corresponding effect upon the payment of in- 
terest — we are ready to examine a further question : Is the mere 
existence of rent-bearing properties, whether of the production 
or of the consumption type, sufficient to guarantee an interest 
rate? 

To put this to the test, let there be assumed the extreme case 
of a society in which agriculture is the only industry, land the only 
instrumental good, with none of this land open either to wear-out 
or to improvement : 



378 THE ECONOMICS OF ENTERPRISE 

There will be rents, surely, but will there be interest, and what will 
determine the rate of it ? By assumption, the land offers no opening 
for social capitalization either by improvement or by upkeep. 
Social saving cannot go into it or social improvidence waste it. 
It contributes to the aggregate income, but it offers no place for 
social savings. Socially viewed, therefore, it can have no bearing on 
the interest rate excepting as, through its contribution to the social 
income, it avails to make saving easier. But there remains, by 
assumption, no rent-earning employment for the savings unless 
to put them into long-time consumption goods. 

But, even so, an interest rate must be established as the equating 
point between the demand for immediate consumption and the 
demand for the enjoyment of long-time consumption goods — 
abstinence on the one side as over against the later incomes acces- 
sible through abstinence. 

But now assume further that goods for immediate consumption 
are the sole possible products : Here, however, as mostly elsewhere, 
the social point of view serves rather to obscure than to illimiinate 
the analysis of the actual competitive process. It is true that so 
far as society is concerned, the lands were not due to any original 
labor or saving, are not maintained by its abstinence, absorb 
none of its current savings, cannot be wasted, destroyed, sold, 
or given away. But little or none of all this is true for the indi- 
vidual owner of land in a competitive society. True — • by assump- 
tion — no individual created the land or can add anything to it. 
But any individual can save, and can buy land with his savings. 
True, he cannot destroy the land or deteriorate it. But he can do 
what, for all his individual purposes, amounts to the same thing; 
he can sell the land, and can then dissipate all or any part of its 
proceeds. For him, then, though not for society, the land is both 
producible and destructible. It is retained by him — if retained at 
all — through his continuing providence, foresight, abstinence. 
So it comes about that there attach to lands reservation prices on 
the part of the possessors and demand prices on the part of prospec- 
tive buyers. And, on either side, these prices are arrived at through 
subjecting the individual estimates of the future incomes to the 
individual rates of abstinence protest. Thus if for the owner 
present consumption outranlcs in attractiveness the long series 
of opportunities for future consumption, he will sell. Just as 
another man may refrain from spending and buy land with his 
savings, so this owner may refrain from keeping, and spend the pro- 
ceeds of the sale. To him for whom having is better than spending, 



THE LOAN RATE: INTEREST 379 

the land will especially appeal as an investment. To him for whom 
spending is better than having, the price of the land will be pre- 
ferred to the land. 

It is thus clear that the existence of any kind of valuable durable 
goods — whether of the production or of the consumption sort — 
is sufficient to support an interest rate. The goods — of whichever 
class — bear rents. Offering future incomes, they offer inducement 
to present abstinence. They fall, therefore, into the hands of those 
relatively the more wiUing to undergo present abstinence for the 
sake of future income. They fall out of the hands of those whose 
preference is relatively the more strong for the present consumption 
— those electing " to take the cash and let the credit go." The 
interest rate is the basis on which is adjusted the sale of these 
future incomes as against present cash. 

Private adventure and interest on funds: Renters' sur- 
pluses. — And we may now safely go one step further : 
The disappearance of interest in a competitive society is 
impossible so long as gainful adventure is open; and gain- 
ful adventure must always be possible so long as there is 
equipment to be hired or any sort of opportunity to be 
exploited. This is a necessary inference from the sole fact 
of buyers' and renters' surpluses. Entrepreneurs being dif- 
ferent, the market rent or the market price of a gain-render- 
ing agent or instrument or opportunity must always afford 
a surplus to some of the employers above the price or hire 
that they have to pay for it. It will not matter for this 
purpose how low the interest rate may, through other in- 
fluences, come to be, or how high the capitalized present worth 
of the instrument may rise with falling rates of interest — 
the earning power to the individual entrepreneur will still 
offer its surplus above the market hire which the instrument 
commands. These surpluses must, therefore, always remain 
among the incentives for borrowing. There will always be 
a market for imm.ediate funds at some rate of interest. 

Interest, private gain, social service. — Not much remains 
to be said with especial reference to the demand side of the 
interest problem. It is clearly through the competitive 
effort for gain that rents attach to the goods that promise 
gain. The renting or purchasing of gain-promising proper- 



380 THE ECONOMICS OF ENTERPRISE 

ties is, however, as we have seen, only one of the ways in 
which the individual makes the possession of suspended 
purchasing power contribute to the gain which he has in 
purpose. The motive of the business borrower is pecuniary 
gain, the largest possible net balance in terms of price. The 
service toward this end is what capital means to him. He 
pays interest on borrowed funds as a step toward this goal. 
These funds may, it is true, be gainful to him through his 
investment of them in instrumental goods which earn rents, 
or in rental outlays for the term use of such goods — lands 
or machines or what not. But equally he may apply the 
borrowed funds, not to land or land rents nor to machines 
or machine rents, but to the payment of interest on existing 
loans, to the hire of labor, or to the purchase of raw materials. 
Or with equal gain, he may use his borrowed funds in adver- 
tising, in insurance, in taxes, in acquiring control of patent 
rights, in the buying of franchises, or in the establishment of 
a monopoly. That productivity through investment which 
has to do with his demand for funds and with the rate at 
which he will hire them, is a productivity attaching to many 
other things than technological capital or social capital or 
equipment goods. 

Thus — be it once more repeated — the gain in question need 
have no sort of dependence upon any contribution to social welfare. 
The enterprise under contemplation may be the equipment of a 
gin palace, or of a gambling den, or of an opium joint, or of a counter- 
feiting plant, or of a dive, or, again, it may be the establishment of 
a Town Topics blackmailing project. Or the outlay involved may 
be purely for the purchase of a tax-farming contract, or for the 
buying of favorable legislation, or for corrupting the police. Or the 
enterprise may involve the purchase of the stock control of some 
competing factory or railroad with a view to plundering it or wreck- 
ing it, or to the end of perfecting a monopoly, or as a step towards 
large gains through short sales upon the Stock Exchange. Neither 
the thrift of abstainers nor the enterprise of borrowers is necessarily 
conducive to social welfare. Some of each is good and some of 
each is bad. Any adventure in the quest for gain, if it require 
loan fund capital in its prosecution, is a basis for the borrowing 
of funds, and therewith of the paying of interest. As the capital 
fund which is loaned may have been derived from crime or exploi- 



THE LOAN RATE: INTEREST 381 

tation, so it may be borrowed and used for further purposes of crime 
and exploitation. The folly that hes in the traditional doctrine that 
all saving is good for him who saves — that for him thrift is always 
wisdom — and the hideous error of the traditional assumption that 
for society capital is always good in its exploitation, have already 
received some attention and may later command still more. 

Thus the demand for loan fund capital includes the need 
of funds for the control of technological productive goods, but 
covers a field of activity indefinitely wider and more varied. 
And within this demand must also be included the call for 
consumption loans of diverse sorts — public and private, 
wars and travel, uniforms and dress suits, cannon and fire- 
crackers. 

Separate independent causes. — Several different bases are 
commonly given for the actual preference for present purchasing 
power over future purchasing power: (1) spendthrift borrowing 
— irrational present consumption at the prejudice of the future, 
(2) rational consumption loans, (3) the technological productivity 
of wealth with passing time. 

We have seen that a premium of present money or of present 
consumables over future money or future consumables might 
attach in a society lacking all gainful activities, e.g., among the 
reservation Indians or among students in the ordinary academy 
or university. Or, equally well, a charge for keeping might occur — 
negative interest — as, for example, when one pays at the parcel 
room for having his suitcase guarded, or pays rent for a box in the 
deposit vault, or, as in mediaeval times, the owners of treasure 
paid the baron on the crag to keep the treasure safe. That borrow- 
ing would take place in the assumed society is clear enough, pre- 
cisely because men differ in desires, provisionment, and foresight. 
But no one can be certain whether in the balance the lending or the 
borrowing disposition would be the stronger. Either might be. 
The mere principle of perspective, whether the borrowing be wise 
borrowing, or unwise borrowing, or both, is alone adequate to main- 
tain an interest rate, but is never certain to do it. 

Equally is the technological significance of goods adequate by 
itself to explain the existence of interest, even though the situation 
were one in which, were all opportunity for gain absent, no premium 
of present over future dollars could attach. 

So, again, the existence of durable consumption goods is alone 
adequate to maintain an interest rate. And, finally, the oppor- 



382 THE ECONOMICS OF ENTERPRISE 

tunity to make gainful use of funds in financing predatory activities 
is adequate to support an interest rate, even tliough the situation 
were one in which labor were the only productive fact in the society, 
in which all durable consumption goods were entirely lacking, and 
in which, in the absence of the demand for funds for predatory 
purposes, no premium of present over future dollars could attach. 
In any competitive society making use of existing wealth as an 
auxiliary of production and of private gain, and employing a money 
standard, the interest phenomenon is inevitable. 

The mechanism of interest adjustment : Reservation rates. 

— The fixation of the rate of interest is a simple problem in 
the mechanism of market price, the demands for funds pre- 
senting themselves as offers of rates per cent, the reserva- 
tion prices being also merely the minimum acceptable rates 
per cent. Demand schedules and supply schedules may 
easily be constructed illustrative of the process of adjustment. 
Schedules of this sort would differ from those familiar in 
earlier discussions only in presenting rates per cent on the 
demand side and on the supply side, rather than prices per 
item of goods. The items of reservation in the lenders' 
schedule obviously report the rates at which the lenders will 
not only refrain from spending their cash resources, but 
will also refrain from exploiting them directly for their 
own gain. 

For many minds, indeed, the interest problem may be simplified 
by a device suggested in earher pages (Chapter V). 

It was there shown that with a given number of goods for sale 
at whatever they will bring, the pi-ice must necessarily adjust 
itself at a level which will find sellers for all ; the terms of the demand 
schedule control. When, however, the sellers are not disposed to 
sell at whatever best price they can get, but, on the contrary, the 
sales are conditioned on certain minimum prices, the problem 
essentially changes and the equating price is another. With the 
appearance of these reservation, or refusal, prices, the supply side 
of the equation appears to be somehow changed — not less goods, 
it is true, but goods differently held ; the price must be a different 
and a higher price. If, for example, the buyers' prices are 10, 
9, and 8, with three goods unreservedly for sale, the price must be 
fixed as low as 8, else not aU of the goods will be sold. But if 
the sellers have reservation prices of 10, 9, and 8, the point of adjust- 



THE LOAN RATE: INTEREST 383 

ment must be higher. At 8, the price at which the buyers will 
take as many as three, the sellers will part with only one. At 
10, the price at which all the sellers will sell, the buyers will accept 
only one. The price must therefore be 9 with two exchanges 
taking place. This earlier discussion also showed that, in accurate 
analysis, the difference between the two cases is really a difference 
in the demand situation ; that the supply is still three, but that the 
sellers have themselves' demands — the supply schedule as ordinarily 
formulated hiding demand elements ; that a better statement would 
be attained by transferring the reservation prices to the demand 
side of the equation, the demand schedule then appearing as made 
up of two demands at 10, two at 9, and two at 8 (10, 10, 9, 9, 8, 8), 
as against an unreserved supply of three. The price would, of 
course, still adjust at 9.^ 

By this device of interpreting reservation as demand prices, 
it is possible to regard the earning powers ascribed to one's 
own wealth under his own management as making up a 
part of the entire demand for such share of his available pres- 

1 The Concept of a Market. 

It has already been noted how admirably this unmasking of the 
demand elements in the prices of the supply schedule fits into and 
illuminates the analysis of cost of production. But the service is 
perhaps even greater in helping to define and clarify the concept of 
a market. For example : is the market for wheat one world market, 
or the Chicago market, or the Liverpool market ? Or is it all 
three, and an indefinite number more ? 

It is at any rate clear that the Chicago market and the Liver- 
pool market are not quite distinct and independent ; the circles 
of different markets overlap and intercept — the more perplex- 
ingly as the more markets are recognized. The explanation is 
to be sought in the fact that the supply or demand of any market 
is potentially supply or demand in any other, and that, with any 
changes in the relative situations, these potentials quickly become 
actuals. Were, indeed, charges for transportation and for handling 
canceled, all the world would become one simple market. And, in 
point of fact, all the world is now one market, but a market with 
varying reservation prices upon the varying supplies under the 
varying conditions of transportation. Theoretically, indeed, the 
market is anywhere and everywhere, if only there are recognized 
the appropriate demand and supply schedules. Just as the axis 
of the earth has been asserted to stick out in every New England 
village, so the world market is at every place, only that in most 
places little business is doing. The locations of the great wheat 
marts of the world, the busy markets, are determined by the eon- 



384 THE ECONOMICS OF ENTERPRISE 

ent purchasing power as is not allotted to purposes of im- 
mediate consumption. The individual's surplus over the 
needs of immediate use is, then, distributed between durable 
consumption goods, gainful investment under his own super- 
vision, and loans to other men for use in any one of the five 
possible ways : (1) immediate consumption goods, (2) con- 
sumption goods postponed in use, (3) durable consumption 
goods, (4) durable investment goods, (5) loans to others — 
in which last case the first borrower is a mere intermediary 
in working out the final distribution of the aggregate loan 
fund. 

So viewing our problem we are able to regard the interest 
rate as the point at which the supply of the available wealth 
of investing or lending individuals — mostly current income 
— is distributed between present uses on the one hand as 
against those uses which, to their investors or lenders, present 

ditions of production, of transportation, and of consumption ; they 
are the points at which purchasers, disposed to pay high prices 
there, relatively to the asking prices, are met by sellers disposed to 
sell low there, relatively to the demand prices. 

This analysis lends further emphasis to the already familiar 
doctrine that any item anywhere, say of wheat, is, at its appropriate 
reservation price, an item of supply anywhere. So any item of 
price-paying disposition is a demand price anywhere, allowance 
being made for the exchange rates bearing upon money at that 
point. The supply of any particular good is all the goods there 
are, no matter at what price held. The demand for the good is 
all the dispositions there are to pay a price to get the good or to 
refuse a price to keep it. 

Computing, therefore, as included within the reservation price 
of any market, all the different transportation charges necessary to 
the delivery of all the different bushels of wheat in the world to that 
market, it is quite defensible to compute the aggregate world price 
of the world crop of wheat in that market as the number of 
items in the world times the price per bushel. Those bushels 
of supply not actually transferred have each its reservation price 
in that market. Theoretically all are present, but some do 
not sell precisely because they are reserved — bid in — at the 
going price. 

Thus it is purely an academic or imaginary rather than an actual 
problem to surmise what the whole supply would actually sell 



THE LOAN RATE: INTEREST 385 

themselves as future uses. The consumption demands of 
borrowers make up part of the aggregate borrowing demand, 
and by this very fact rank with reference to the lenders as 
uses future for them. 

The pain-pleasure theory of interest. — It should now be 
evident that all attempts to explain the rate of interest as 
the point of equation between the pains or sacrifices of lenders 
and the pleasures or benefits or gains of borrowers, or to 
explain the rate of interest as a rate of preference for early 
enjoyable income over late enjoyable income^ must rest 
ultimately upon the assumption that, for the purposes of 
the problem, society may rightly be regarded as an individ- 
ual and organic thing. For, after all, how arrive at an 
equality between pain on the one side and pleasure on the 
other side, unless the pain and the pleasure pertain to the 
same individual? And whose is the preference when one 
of the incomes is chosen against another? The actual so- 
ciety is a competitive society. And for a competitive so- 
ciety it must be recalled (1) that the interest phenomenon 
points solely to a preference for present money over future 
money, and (2) that the saving has to do with some individuals 
and the paying with other individuals and, therefore, that 
neither the impatience of the different lenders relative to one 
another, nor the gains and advantages of the different bor- 
rowers relative to one another, are to be made simple and 
homogeneous quantities. And still clearer is it, that in 
view of all the different lenders on the one side and of all 

for, were all to be forced upon the market at whatever price were 
necessary to market all. This is really to ask what effects would 
follow the cancellation of the actual reservation prices. 

Essentially, however, this is what is done by certain economists 
who have argued that there is no such thing possible as a world 
market price for the entire supply of any commodity. ^ Precisely 
what would happen if existing conditions were absent — if the 
holders' demands were canceled — one may not easily conjecture, 
though clearly the price must fall. 

^ See, for example, " Some Limitations of the Value Concept," Allyn A, 
Young, Quarterly Journal of Economics, Vol. XXV, No. 3 (May, 1911), 
p. 409. 

2c 



386 THE ECONOMICS OF ENTERPRISE 

the different borrowers on the other side, no adjustment can 
possibly be reached expressing any general or aggregate rate 
of preference for present goods, or present incomes, or present 
money, as over against some corresponding quantity or 
item or thing in the future. 

Proposed equation impossible. — And equally obvious 
is it that no protest, impatience, or sacrifice of any one in- 
dividual as lender can be equated against the advantages 
or gains of some other one individual as borrower. As the 
lenders are many and different, and as the borrowers are 
many and different, so are the sacrifices different and the ad- 
vantages different. The difficulty here with the social organ- 
ism interpretation is precisely parallel to the earlier difficulty 
of making all the different pains of different producers of 
goods homogeneous and equal, and all the different utilities 
of different purchasers homogeneous and equal, and there- 
upon equating this aggregate of costs against this aggregate 
of utilities into a price expressing either a marginal sacrifice 
or a marginal utility. The mere fact that, precisely as there 
are both sellers and buyers variously distant from the margin 
in the fixation of price, so there are borrowers and lenders 
variously distant from the margin in the fixation of the rate 
of interest, vetoes the possibility of resolving the interest 
rate into some social or aggregate balance of preference for 
early enjoyable income over late enjoyable income. And 
more than this : even with the marginal lender, nothing is 
to be inferred as to the degree of his sacrifice in saving or 
of his advantages in lending, more than that these two quan- 
tities, each of unknown absolute magnitude, are yet equal 
one to the other. Still less is there warrant, either in con- 
tracts of sale or contracts of lending, for the assumption that 
the magnitudes involved are equal for the two parties to the 
transaction. The only equality to be asserted is that to 
the marginal lender the advantages of lending are equal to 
the disadvantages, and that to the marginal borrower the dis- 
advantages of borrowing are equal to the advantages. There 
is no equivalence of the disadvantages to the lender with the 
advantages to the borrower, nor any equality between the 
importance to the lender of the present income which he 



THE LOAN RATE: INTEREST 387 

lends and the importance to the borrower of the future in- 
come which he returns. 

Social explanations. — But the final objection to any possible 
way of explaining interest from the point of view of the social 
aggregate is in the fact that the productivity which motivates the 
borrowing of funds is productivity only in the sense of service for 
private acquisition. Anything is productive to the borrower 
which makes for an increment of price to him. The borrowed 
purchasing fund may, indeed, be directed into machinery, farms, 
or raw materials, — into lines, that is to say, of technological and 
social productivity, — but, equally well, it may not. The social 
organism doctrine is a doctrine exclusively for optimists. In 
point of fact, any adventure promising a gain in terms of price 
may contribute to the demand for loanable funds, and, as based 
upon it, there may emerge an interest rate.^ 

^ The Social Organism. 

The difference between an organization and an organism is 
hard to define, simply because we do not know what life is. An 
organism is an organized unit possessed of the mysterious thing 
that we call life — a fact and a concept from the field of biology. 

The distinction between a social organization and a social organ- 
ism is the same distinction : a social organism must be a something 
in which the principle of life is the basis of the organization. Social 
organizations there are without limit. Each of us may be a mem- 
ber at large in an indefinite number — the family, the church in its 
different branches, the State in its different subdivisions, the 
Masons, the Odd Fellows, the Royal Society, the Academy, the 
Anti-Tuberculosis League, the International Peace Society, the 
reading circle, the Club, and the football team — perhaps also in 
the world and the Universe. Are all of these also organisms in the 
sense of things themselves alive, rather than merely made up — 
some of them — of things which are separately alive ? 

They may be : how can we know, not knowing what life is ? 
The biologists do not so declare them ; they see no evidence of the 
centralizing, coordinating, organizing activity of that strange 
fact called life. Each of these organizations appears to lack that 
sort of unity which we call individuality. But it may none the 
less be there. In a family of father, mother, and two children, 
there may be, unknown to any member of it, still another member, 
a fifth individual, the family itself. There may be, indeed, two or 
three or a dozen of these others ; how shall we deny it ? Unproved, 
it is also undisproved — and undisprovable. We do not know. 
Likewise, how can we assert it ? For anything that we know to 



3^8 THE ECONOMICS OF ENTERPRISE 

This chapter should have made clear that mterest is one 
reward for waiting, but that, in its strict technical sense, it 
is only one of many rewards ; that all rents or services from 

the contrary, every atom in the Universe may have each its sep- 
arate psychic aspect and activities — herein resting the secret of 
chemical affinity : their souls are drawn to one another or are seek- 
ing their mates. But is it science to assert it or to assume it ? 
And have we thereby explained anything ? One mystery is not 
the competent solution of another. This sort of explanation is 
merely pseudo-explanation — faith or metaphysics or guess. In 
similar jargon, principles are sometimes said to be working them- 
selves out, or to be engaged in the process of realizing themselves. 
But talk like this means merely that some unknown X is doing 
something or other. We recall from Goethe "Men often think, if 
only words they hear, that therewith goes material for thinking." 
So also Gilbert and Sullivan : 

"Her gentle spirit rolls 
Through the melody of souls ; — 
Which is doubtless very pretty, 
But I don't know what it means." 

Nevertheless it may roll. It may be that the Universe, as a unified 
organized thing, is alive in every detail — an organism in the 
biological sense — as Pan-psychism declares to be the ultimate 
truth. Surely somewhere in the Universe all that there is in it 
has its explanation — if only we could find it. But the mere 
assertion of this large fact — taking it as a fact — is not an ex- 
planation of all the intermediate subordinate facts. After all, 
what is explanation in our human sense? We understand not one 
whit the better any single item out of a great whole, by discovering 
that, taking it as a whole, it stands for us as merely one gigantic 
flux and pow-wow. To assert this is rather so far a confession of 
our total lack of understanding. The social organism people 
greatly need to master the distinction between an explanation and 
a mystery. It is not the solution of a problem to give it up, nor 
the unriddling of your riddle to confess that you yourself have no 
solution. 

Good rhetorical usage does doubtless permit us to speak of 
human beings in aggregates, with the use of a singular verb : the 
Committee is agreed; the group disperses ; Congress votes ; the army is 
marching. We may talk of public opinion, esprit de corps, the spirit 
of the times. But probably no one understands this collective 
use to imply or to assume organic unity. 

Equally well we may say that the army are marching, the com- 



THE LOAN RATE: INTEREST 389 

durable goods, whether farms, franchises, patents, instru- 
rnental goods, or durable consumption goods, are rewards for 
waiting ; that since the lender of any good is an abstainer, if 

mittee are agreed (with one another), the proper use depending on 
whether the group is taken as a whole or by its constituent units ; 
the crew ivas exhausted or the crew were exhausted — accordingly 
as we mean one thing or the other. Though the act or the situa- 
tion is really one of each individual separately, there is no actual 
ambiguity or uncertainty involved in saying that the battalion 
is eating dinner. The activities are similar, roughly simultaneous, 
and are thought of in block. True, one man eats rapidly, another 
slowly, some little, and others much, and a few sick ones not at all, 
— but the expression serves, and implies its own limitations of 
accuracy. And so of an army, when we say that it marches, no 
doubt is even faintly suggested that each one does his own walking, 
works his own muscles, uses up his own tissue, and that presumably 
many are halt, some falling out by the wayside, while still others 
limp, and some swear. But no one of these differences matters 
for the purposes of the thought in mind. True, the expression is 
in strictness inaccurate, were any perversity bent on misinter- 
preting it. But when it comes to asserting that the army is brush- 
ing its teeth or has stubbed its toe, there is obvious difficulty. 

And for purposes of the accurate analysis of the price problem, 
there is really the same difficulty in thinking of a social coldness 
or hunger or desire or pleasure or pain. In the price problem, the 
need is to understand precisely how the particular individuals 
arrive at their respective demand prices. There is no one single 
homogeneous utility nor any one single aggregate demand price. 
Utility, for the purposes of the analysis, is an individual category. 
Even in public finance, the tax costs and the public services are 
ultimately individual. 

It must, at any rate, be clear that if society is an organism at 
all, it is an organism of a very low order — like, say, the jellyfish. 
But it is only to the higher orders of organisms that mind and 
thought and purpose and will can be confidently ascribed. To 
interpret social phenomena in any organic sense adapted to explain 
them, as connoting judgment, appraisal, comparison, approval, 
condemnation, — the social organism must take on the attributes 
of personality. 

So far as we can make out, personality implies a distinct, sepa- 
rate, and centralized psychic unity, in which at least four things 
are essential — thought, will, consciousness, and memory. Try 
to make out what the you would be, lacking any one of these. 
What makes you you? Unconsciousness means the suspension 
of individuality. Perhaps thought and will are not quite so clearly 



390 THE ECONOMICS OF ENTERPRISE 

not by foregoing the direct use of his own wealth, then by 
foregoing the sale price of it, all rental and service incomes 
are therefore abstinence incomes ; that here once more the 
distinction between land and other instrumental goods breaks 

essential. But, obviously enough, there is no personality without 
memory — the cement that binds together states of consciousness 
which would otherwise be unrelated. What makes the you of the 
present moment the same person with the you of a half year ago ? 
Dual personality is a duality of independent memory systems. 
If in the next life we are to remember nothing of this one, it can- 
not greatly matter whether we are to live again or not ; immor- 
tality, on terms of entire forgetfulness, would be a valueless gift — 
not the continued life of one, but the birth of some one else. So 
far, then, as we know, there is no social organism in the sense of a 
personality fulfilling this fourfold test — fulfilling, indeed, any one 
of the four tests. 

Not the less, however, must it be frankly admitted that a mere 
hypothesis, as sheer assumption, if it offer a working explanation 
of facts which otherwise must go without explanation, becomes 
thereby something more than mere hypothesis or assumption. 
That it fits the facts, harmonizes them, unifies them, makes them 
consistent when nothing else will, is some inductive support of 
its truth. On these terms, any hypothesis, however tentative, 
may stand, pending the coming of something better. The organic 
hypothesis may, in truth, be so far better than nothing. But not 
much better ; it leaves us in the unsatisfactory position not only 
of affirming that of which we can have no knowledge — which is 
bad — but of alfirming a thing of which we also affirm that we can 
never have any knowledge — which is worse. 

But will the social organism hypothesis meet this test of sole 
unifier of the facts ? Are there other possible explanations ? Are 
we yet compelled to resort to these devices of speculation and 
quasi-explanation ? It is at any rate a crass abuse of hypothesis 
if it be made to stand as an obstacle in the way of the search for 
an explanation in terms of what is already known. A hypothesis 
can never be employed as the refutation of any offered explanation, 
as answer to it, or defense, or objection ; it holds its place by 
tolerance — by the mere negative fact that nothing else is available. 
It has no evidential quality or argumentative validity. It is 
rather a standing promise of abdication in favor of anything that 
can make an affirmative case. It is an invitation and an exhorta- 
tion to continued research and to constructive effort. 

Does, then, the social organism hypothesis fit the facts of a 
competitive society ? It might do well enough — if nothing else 
would — for the coUectivist or socialistic form of organization ; 



THE LOAN RATE: INTEREST . 391 

down, together with the distinction between rent and interest 

— land incomes and other incomes — in relation to cost of 
production; that all the different incomes accruing from 

but does it express the divisions and antagonisms of interest and 
activity characteristic of a competitive organization — the preying 
of cell on cell ? When, at the equation of market price, a bushel 
of wheat is exchanging against a dollar of gold, shall we abandon 
the demand schedule with all of its different items of offer of gold, 
and the supply schedule with its different reservation prices — 
each item of price offer and of supply having its distinct explanation 
in individual comparisons and individual choices of alternatives 

— and shall we, pronouncing all these unactual and inadequate, 
a hopeless quest, betake ourselves to the explanation that society, 
in its organic unity, has appraised gold separately as a value, and 
wheat separately as a value, and has found them as equal values, 
so that now an equality in exchange relations can occur ? Or, 
if a football coach is accorded a salary of a thousand dollars a 
month and an instructor in Economics a salary of a thousand a 
year, shall there be offered, as ultimate and final explanation, the 
statement that society, the world at large, or the Universe, organi- 
cally approves or appraises or values one service twelve times as 
highly as the other? And if a highway robber gains $200 from 
ten minutes of daring and a cellar digger two dollars for 600 minutes 
of boredom, it will be evident that society appraises the pains and 
waitings of the one at a worth of $20 a minute against a worth for 
the other of i cent a minute. And when the monopolist, by pro- 
ducing half as much product, gets twice as much gain, it will be 
clear that society evaluates the half at twice as much as the whole 

— the interference with production at double the contribution to 
production. There should evidently be somewhere a social insane 
asylum in which to confine the social organism. So when the 
lawyer, skillful in advising his clients how legally to do illegal things, 
gets especially generous fees, this shall be the proof that society 
finds his services to be highly beneficent. When canned poison 
brings 20 cents per can and canned corn half as much, this shall be 
taken to be the idiotic judgment of the aggregate social idiot. By 
similar devisings, also, are to be explained the dear cheapnesses, 
the adulterations, the lying advertisings, the prostitutes, the vice 
trusts, the gambling syndicates, the purchased judicial honor, the 
of&ces sold at a price, the elections bought by money for gain, the 
speculations, the sinecures and the graft; society is organically 
plundering its organic self, buying itself, selling itself, lying to 
itself, poisoning itself, making (part of) itself rich at the expense 
of (part of) itself. And all these market prices and all these indi- 
vidual gains shall stand — by proof of hypothesis — as the ap- 
praisals of the racial judgment. 



392 THE ECONOMICS OF ENTERPRISE 

possessions with passing time are to be termed interest, so 
soon as the source of the income is expressed as a money value, 
a price item, and the income expressed as a rate per cent upon 
the price of the source ; that as the fund derived from the 
sale of a farm may be invested as an item of loan fund, which 
now earns interest in place of the rent which the farm earned 

But to many men who accept the point of view of the social 
organism, the foregoing criticism will appeal as mere travesty. 
They mean none of the things charged against them. They do 
not take society to be a great animal — either male or female, 
or both or neither. All that they mean is that men in society are 
in mutual relations of influence and interaction, that each man 
has truly his individual tastes, choices, desires, demands, costs, 
sacrifices, hopes and fears, but not separately in the sense that 
any one is free from the influence of others and of their shaping 
power — free, that is, from the social milieu in which he has lived. 
We want clothing as much because other people's glances beat 
upon us as that the sun's rays scorch us. We desire the admiration, 
the approval, the fear, and the envy of our fellows. Of this sort 
may be most of the significance of palaces, carriages, champagne, 
or neckties. We never act or think or feel in isolation. We 
are individuals in a society. In a sense, therefore, the individual's 
desires are social in their derivation : Utility to the individual is 
a social utility. 

That so much as this is true must be admitted ; and let it forth- 
with be added that no one ever doubted it. But when one has a 
desire — no matter whence it came — it is his desire, and not the 
desire of the world at large. No matter when or where or how you 
get hungry, it is now your hunger, and not the hunger of the fresh 
air or the long walk that gave it to you. It may, indeed, be due 
to the fact that you hav^ seen others eating. Even the feeling of 
being cold may be social in its occasion. But your cold is not 
thereby a social cold. You may, in truth, feel so much the colder 
as you see the people about you the more snug and smug. Your 
cold does not then translate into a social warmness. Your piety, 
again, may have been taught you ; but it is not now the piety of 
your parents, or of the neighborhood, but only of yourself — even 
as a breakfast to which all climates have contributed is one man's 
breakfast rather than an international breakfast. Perhaps your 
brother's impiety has come as a reaction against the overpiety 
of his neighbors ; but it is not now either a social piety or a social 
impiety. If you get the bubonic plague via some international 
rat, it will not be Asia or the rat or the world, but you that will be 
sick ; and if you die, the funeral rites will be said over you. The 
resultant from a parallelogram of forces is not all of the contribut- 
ing directions at once, but one definite new direc<^ion. 



THE LOAN RATE: INTEREST 393 

before, so a tenant may pay as rent on land the same sum that, 
as purchaser upon mortgage, he might have paid as interest, 
and the same sum that as borrower he might have paid upon 
the funds with which to purchase the farm ; that distinctions 

Note, finally, how far the interpretation of the social organism 
must go. If the fact that one's tastes and habits are copied from 
other men makes these tastes and habits not his but theirs ; if 
the mists floating inland from the sea are still sea, the grain from 
the soil still soil, the soil that was rock still rock, the skippers in 
the cheese still cheese ; if origin and genesis not merely shape and 
determirje what a man is, but also define him in terms of them- 
selves, make him them, absorb him, — we shall, by this route, 
arrive not at social estimates, social desires, and social values, 
but at cosmic judgments, cosmic estimates, and cosmic valuations. 
For to our contemporaries, truly, is due much of the shaping of 
us ; but still more is due to the generation next preceding, or to all 
the endless past. Many also of our individual aims and activities 
have in view future human beings — our descendants or the race 
in general, their admiration, their approval, or their welfare. The 
social organism in the sense of the directive society must include all 
human generations of all races and of all times, past, present, and 
to come. 

But if our quest is for origins ^f or directive, determining, shap- 
ing facts, we must include more than the influence of human as- 
sociations past and present. We shall include as well all the past 
environment and no small part of the future — the storms of 
the past centuries and the storms that are yet to be — the wild 
animals that we have made om* prey and the wild animals that 
have made us their prey — the malevolent microbes and the benef- 
icent — the pestilences that have walked and are walking by 
night, and the fevers of primitive and of present noondays — all 
past climates and all past suns and all seas and rains. 

Nor are we to forget that other suns and the most distant stars 
are raining their beams upon us and prompting us to poetry and 
romance and to scientific moonshine — and have been at it for 
countless generations, and will remain at it for some time yet. It 
follows that all the past and the future of the solar system and of 
all the stars in the infinite spaces are within the causal complex. 
There is nothing for it but to learn to think and talk of the social 
cosmos. And once having learned to think clearly in this emphasis, 
we shall shortly have the logical insight to see that the word social 
is mere tautology ; we shall talk simply of the cosmos. And hav- 
ing found, as our great conclusion, that all things are explained 
by the cosmos, we shall — perhaps — return to our place of be- 
ginning, ready to fare forth, unincumbered, in the search for real 
explanations. 



394 THE ECONOMICS OF ENTERPRISE 

regarding the origin of different possessions have no relation 
to the price of the possessions, to the abstinence involved 
in holding them, to the uses which are made of the properties, 
or to the rates of return which they render on the invest- 
ments ; that, as salable by the owner, every durable good 
must represent a waiting by him, no matter whether he rents 
the property or uses it directly himself ; that if the problem 
of origins really concerned the owner, it could in many cases 
never be solved by him, nor always trustworthily by any 
one else. 

It is also clear that the thing that is lent in the 'capital 
market is suspended purchasing power, and that the absti- 
nence that interest rewards is the abstinence involved in 
lending this purchasing power ; that all other possessions 
lent for hire command only rents — a form in which the re- 
turn is not expressed as a per cent, per dollar, per period ; 
that there is in neither of these abstinences any pain or any 
necessary connection, direct or indirect, with painful expe- 
rience ; that therefore interest cannot express any equality 
of the lender's pains to the borrower's pleasures ; that there 
is, in fact, no equality of anything involved in the interest 
relation excepting an equality of the ratios which, for the mar- 
ginal lenders and borrowers respectively, must exist between 
the advantages and the disadvantages of the interest rela- 
tion. 

But it has been shown that notwithstanding all this, ab- 
stinence has to do with interest as one of the influences limit- 
ing the amount of purchasing power in society available for 
future purposes. Every abstainer has his separate marginal 
abstinence from present consumption, a margin affected on the 
one hand by the degree of the pressure of his present needs, 
and on the other by the advantages anticipated from the 
savings. The point, or margin, to which his saving will be 
carried, and the volume of his funds laid aside from present 
consumption, must be affected by the individual's total of 
income, the pressure of his present need, his prospect of future 
income, and his prospect of future need. The demands upon 
his present revenue are, then, (1) his immediate needs for 
present consumption, (2) his opportunities for investment in 
durable consumption goods, or in durable production goods 
or in gainful business generally, (3) the demands of others, 
for their immediate consumption, (4) the demands of others 
for any of the three forms of income-bearing investment. 



THE LOAN BATE: INTEREST 395 

But fundamental to all of these different uses is the amount 
of the present fund ; how far the various demands upon it for 
future uses will absorb it must depend, in part, but only in 
part, upon the strength of his present needs, but in equally 
great part upon the advantages anticipated from the future 
uses. It is thus again evident that durable consumption 
goods are capital ; they absorb present income for future pur- 
poses ; they promise returns in valuable future services, 
which returns, when expressed in terms of price upon an in- 
vestment of price, arrive at the typical interest statement. 

It has also been shown that, while the ''impatience," or 
abstinence temper in human nature might or might not, in 
given conditions, suffice to establish a market rate of interest, 
the existence of durable production goods or of other oppor- 
tunities for gain would, in any case, necessitate a market rate ; 
that an interest rate being already established, the opening up 
of opportunities for investment in production goods, or in 
any direction of gain, must increase the advantages going 
with saving, and must therefore modify the interest rate. 

It is also clear that the investment demand for funds is the 
aggregate of all the different dispositions to obtain ownership 
or control of either durable production or consumption goods, 
or to enter upon gainful enterprise of any sort ; that gainful 
enterprise takes countless lines of direction — some of them 
social and others anti-social — into anything subserving the 
ends of private advantage ; and that the point of adjustment 
between demand and supply is the interest rate for the partic- 
ular supply of funds. 

And it has further been made clear that the interest rates 
fixed in this process of market adjustment can find no ulti- 
mate basis in the burdens or pains or merits of any lender 
and can express no quantitative sum of pain or loss or sacri- 
fice to him, but can indicate only that, at his margin between 
saving and lending, the advantages of saving are equal to the 
disadvantages of lending ; that the marginal saving of differ- 
ent abstainers can indicate no equality of burdens or ab- 
stinences or displacements between the abstainers ; that 
likewise the marginal borrowings of different borrowers can 
express no equality of benefits between the borrowers ; and 
that the payment of interest by one borrower to one lender, 
or by the marginal borrower to the marginal lender, does not 
express the quantitative equality of the gain or benefit or 
utility to the borrower with the labor or burden or pain or loss 



396 THE ECONOMICS OF ENTERPRISE 

of the lender, but only an equality of ratios for each of the 
parties, in his marginal saving or lending or borrowing, be- 
tween the advantages and disadvantages involved. All the 
processes in the interest problem require a thorough individ- 
ualizing; explanations by aggregates or averages or by the 
social organism are all equally inaccurate and inadequate, are 
all equally misleading in their conclusions, and are occa- 
sionally most vicious in their applications. 

The chapter to follow will examine the relations of risk 
to cost of production, to interest, and to profit. It will 
make clear that risk is one out of a large number of costs 
not easily reducible to any of the traditional cost categories ; 
that against many of the hazards incurred by the entrepreneur, 
insurance may be secured on terms of outlays which are 
plainly costs ; but that many of the hazards are inevitably 
carried by the entrepreneur himself, e.g., hazards of bad 
markets, of cut-throat competition, of restrictions of credit, 
or of entire withdrawals of credit, and of insolvency ; that 
these dangers are the greater as the resources of the entre- 
preneur are less ; that thus the smaller competitor has in 
many directions the higher percentage of costs — paying 
higher for such bank and other credit as he obtains, and being 
limited at the same time, not only in what he can get, but 
as well in what he can safely employ; that his competitors 
of larger resources or of better alliances in credit relations 
are able to obtain credit on cheaper and safer terms, and even 
to dictate when, if at all, he shall have it, and on what terms ; 
that in this fact that the risk costs are more as the ability 
to compete is less, is illustrated the Law of Advantage and 
Size, later to receive full examination ; that in larger part 
because of these greater risk charges and burdens, the small 
business tends to remain small or to be absorbed in some 
larger and more prosperous business unit. 

The chapter will also show that to distinguish accurately 
risk charges from interest is difficult if not impossible ; that 
interest, as the reward of the lending abstainer, or as his 
indemnity for foregone opportunity, or as a premium of 
present over future money, can leave no place for risk charges 
in the rate ; but that looked at from the point of view of 
the borrower, the entire payment appears as the price of 
the advantage in prospect. 
^_In other cases, risk gains are difficult to distinguish from 



THE LOAN BATE: INTEREST 397 

profits. If the hazard is one attaching to the invested 
capital, the return for the hazard is obviously rather risk 
interest than risk profit. And where the return is not more 
than the cost of the risk, there can accurately be no room for 
any profit or gain of any sort. Nor, finally, if profit be 
defined — as will on the whole seem best — as the remunera- 
tion of personal entrepreneur activity in the pursuit of gain, 
can risk returns make part of profit. Only, in fact, when the 
pay for carrying the risk outruns the cost of carrying it, as 
is typically the case in insurance, is there accurately gain of 
any sort ; and even then it is not clear that gain from carry- 
ing risk should require a separate and special name. 



CHAPTER XX 

RISK, PROFIT, AND INTEREST 

Risk may be a cost. — It is a commonplace that if all 
merchants could sell their wares always at cash, the prices 
of the goods could be lower to the buyers. Only such cus- 
tomers as paid would be able to get goods at all ; there 
would then be no need that the paying customers should 
make good the defaults of the nonpaying. In the long 
run it is the customer who pays who foots the bill for the 
customer who does not pay. The poor accounts are really 
a part of the merchant's costs of doing business with the 
customers who pay. The selling price, therefore, includes a 
loading for the average risk that the bill cannot be collected. 

It is clear, then, that there are costs in business other than 
the four cost categories with which economic analysis is 
familiar — wages, profits, rents, and time discounts. In 
addition there are taxes, and advertising, and royalty out- 
lays, and ordinary insurance premiums ; and there are also 
the costs of those risks which the business man himself must 
carry — not to speak of a wide variety of other charges. 

Noninsurable risks. — The risks against which the busi- 
ness man either cannot or does not insure are many. There 
may, for example, because of his dubious credit, be higher 
rates to pay upon the funds that he borrows. He pays the 
more as he is able to pay the less : '' From him that hath not 
shall be taken even that he hath." It is in this respect that 
it is especially well to be of the inner circle in financial in- 
stitutions, to have a share in the management, or at any rate 
to stand high in the favor of the men who do the managing. 
Otherwise a competitor may enjoy the large loans at the 
favorable rates, or may have the advantage of special facili- 
ties for obtaining loans when he needs them most, or of hav- 

398 



RISK, PROFIT, AND INTEREST 399 

ing them extended if he is ill prepared to meet them. Many- 
projected enterprises, railroads and others, never get started 
because the credit negotiations are blocked by opposing 
interests. Or the favored business man may even be allowed 
to dictate the rates which his competitors must pay, or, not 
rarely, to decide when, if at all, the loans shall be granted, 
or, still better, to determine when these loans shall be called. 
His competitors are made to pay well for what they get 
and, even on these terms, may regard themselves fortunate 
to get anything. 

Affiliations and costs. — These risk-costs of the business 
man, in view of his facilities for meeting and disposing of 
risks — the significance, that is, of credit and of credit 
affiliations — are thoroughly well recognized in the business 
world, are of enormous significance for business success and 
business gain, and are yet strangely neglected in economic 
literature. It is, indeed, commonly asserted that any busi- 
ness man, able, energetic, and trustworthy, will always find 
at his disposal whatever " capital " he needs. 

Risk-costs of weak competitors. — The fact that the small 
business does not get larger is so much a commonplace that 
the implications from it are likely not to be recognized or 
the meaning of it realized. The small business, whether 
shop or factory, is often at some disadvantage against a 
larger competitor by the mere fact that the small is small and 
the large is large. The larger concern can buy more cheaply, 
manufacture more economically, sell more closely. In many 
enterprises there is pronounced advantage going with the 
size of the business unit. The elimination of the small com- 
petitors and the progressive increase in the size and power 
of the larger are striking facts in modern business. The 
larger gets still • larger because it is large in the beginning : 
the smaller dwindles because it was originally small. 

But if the handicap of the small lies in the sheer fact of its 
smallness — precisely as the curse of the poor has been said 
to be their poverty — why does not the small business 
forthwith make itself bigger, as, we are informed, it easily 
could ? Why is it that so many men and firms and corpora- 
tions suffer for lack of capital, that the undertakings are 



400 THE ECONOMICS OF ENTERPRISE 

unprosperous or poor or failing by the mere fact that they 
are small? Or, take it, even, that a business is prosperous 
despite the fact that it is small : why cannot the proprietor 
extend it? If only he had the " capital," he could easily 
double his operations, and possibly also at a higher rate of 
gain upon each dollar of his larger volume of business. There 
are banks enough, and lenders enough : why need he lack 
for funds? 

Differential opportunity. — Precisely here come in the 
meaning of credit to the business man and the importance 
to him of the amount and rate and time and temper of the 
loan. In this aspect especially, is it important to have favor- 
able affiliations and connections and communities of interest. 
To belong to the right group is to enjoy great differential 
advantages and to possess the key to business opportunity 
in general. There is far more in credit than mere good repute 
for wealth, cautious business methods, and faithfulness to 
obligations. 

Risk limit on size.^ — Thus, it may be that the business 
man in question may not be able to command the resoiu'ces 
by which, if he could get them, his gains would greatly in- 
crease, and for which, if he could get them, he might afford 
to pay a generous interest charge. His business remains 
small merely because it is small. 

Or if he gets the funds, he may be obliged to pay so high 
a rate for them, or so to hazard his control of the enterprise, 
as to prohibit any move toward expansion. This is a class 
of risks which the entrepreneur cannot get carried for him 
by others at any level of premium. The lender takes a risk, 
it is true, and the borrower pays him for it ; but the borrow- 
er's risk is not thereby the less, but the greater. And the 
more he tries to extend his business upon a given basis of 
capital and responsibility, the higher he will commonly have 
to pay for the funds that he borrows. On these terms the 
advantages which go with size may be speedily exhausted. 

More responsibility, less risk-cost. — The total of the 
entrepreneur's net individual wealth is, in fact, an ultimate 
guarantee fund, a sort of margin, which, as finally and solely 
liable for the losses of his adventure, not only affects the 



RISK, PROFIT, AND INTEREST 401 

rate and terms on which he can get funds, but also limits the 
amount which he can get. 

And more importantly still, his reserve of net investment 
limits the funds which, consistently with safety, he will be 
willing to borrow. To extend his operations may indeed 
be gainful, if all goes well. But he must beware of water 
beyond his depth : he must avoid so much sail as to risk 
the foundering of his boat under any sudden puff or gust or 
stress. Or — changing again the figure — he must keep 
his lines of retreat open. If, instead of things going well, 
as he believes they will, they go ill, as he knows they may, 
he must be prepared for the emergency. Panics may come 
when, even though a favored customer, his bank cannot pro- 
tect him. Or the bank itself may suspend or fail. These 
are dangers which in accurate business computations are 
costs; they are the greater as the ratio of operations to 
ultimate responsibility becomes higher. When costs of this 
sort are properly allowed for — when the business man ade- 
quately recognizes as costs what the economist rarely recog- 
nizes as costs at all — the marginal limit of production is 
easily reached. To carry his adventure further would be 
to assume a further risk of loss disproportionate to the prom- 
ise of larger gain. 

Hazard, cost, and profit. — The principle that hazards of loss 
are costs has many illustrations. The unharvested crops form, in 
the long run, part of the cost of the harvested crops ; the prospecting 
which discovers no treasure is cost for the treasure that is discovered ; 
the blanks in the lottery must indemnify the management for the 
prizes. " We are not at liberty," as Marshall remarks, " to treat 
the high earnings of successful men as rent without making allowance 
for the low earnings of those who fail." ^ 

It is evident that when the compensation for risk is only suffi- 
cient to cover the risk, there is no room for profit in the accurate 
sense of the term. Profit from the carrying of risk can emerge only 
when the cost of the carrying is less than the remuneration. 
Accurately, the speculator's so-called profit is merely the cor- 
relative of the risk assumed rather than a reward for skill or effort. 
One who tosses a penny and wins, obtains a remuneration for 

^ Alfred Marshall, Principles of Economics, 4th ed., Book5, Chap. V. 
2d 



402 THE ECONOMICS OF ENTERPRISE 

assuming the equivalent chance of loss. The buyer of town lots for 
a rise is paying the sum which the market fixes as the price of the 
property in view of the chances both of rise and of fall. There 
may, of course, be exceptional skill or exceptional information on 
the part of the operator ; so far as this is true there is room for 
profit as the reward for his activity. But, in the main, what the 
operator gets more than a mere interest return is received as gain 
upon a fortunate wager. Nor does the term risk profit cover the 
logical objection. When one lends " capital," he charges something 
extra for risk and calls it interest, or risk interest. He gets more 
if he gets anything, because of the danger that he will get nothing. 
The extra charge is a premium upon the risk accepted — an incre- 
ment in excess of true interest on the investment — because of the 
hazard that there may be neither interest nor principal. But the 
risk charge takes the form of a rate per cent computed upon the 
principal sum, and is paid to the lender together with the use charge. 
Thus it is easy to confuse it with the use charge and call it interest. 
If, however, a surety company had carried the risk instead of the 
lender — had guaranteed him from loss and had charged him a rate 
per cent therefor — the real nature of the transaction would have 
been evident. 

It is clear, then, that, viewed as the reward of abstinence, interest 
cannot include the risk share in the amount received. Viewed as 
any sort of compensation to the owner for an opportunity of in- 
vestment foregone, risk must be excluded. And as the difference 
between the present value of goods and their future value, interest 
cannot cover risk ; only as the difference between a certain present 
value and a contingent future value could the risk charge be included 
in interest. 

Adopt, however, the standpoint not of the lender, but of the bor- 
rower, and the question takes on another aspect ; interest becomes 
a payment for the use of wealth, or, more accurately, a payment for 
the difference in desirability, to the borrower under consideration, 
of present over future goods — or, more accurately still, of present 
over future purchasing power as reckoned in the prevailing standard. 
For the marginal borrower the interest is the approximate equiva- 
lent of this difference. 

That is to say, the risk payment is received by the lender in one 
character and is paid by the borrower in another. It advantages 
the marginal lender nothing or nearly nothing ; the risk fact may, 
in truth, diminish his net or pure interest, by its effect to retire 
some part of the total demand ; it burdens the borrower as a cost ; 
it is like a tax imposed on the loan relation. 



RISK, PROFIT, AND INTEREST d03 

Gains from assuming risks. — To whom, then, goes the gain to 
correspond with the aggregate of loss to borrowers and lenders? 
It does not necessarily follow that the entire benefit of this inter- 
mediate quantity — this tax — accrues to the defaulting borrowers. 
There is room for lenders' surpluses in the relation, — that is to 
say, there may be, in favor of the nonmarginal lender, a differential 
between what it really costs to carry the risk and the compensation 
which the market premium upon risk allows. And this differential 
is the only case of true risk profit in the interest relation; subject 
to this modification, the premium is the precise equivalent of the 
accepted danger of loss. 

Terms appropriate to the relations. — But it remains to decide 
what name shall be given to the entrepreneur's return for his risks. 
It is often regarded as a portion not of interest, but of profit. But 
as it is evidently not remuneration for the personal factor in pro- 
duction or in business activity of any sort — not pay, that is, for 
labor of superintendence or for any other form of effort, but only 
compensation for the danger incurred of failing to get compensation 
— there is force in the view that the special category of risk proM 
should be recognized. The objection to this is, as we have seen, 
that, just as when one lends his capital he charges something extra 
for risk, and calls it interest or risk interest, so when he puts his own 
capital at risk in his own business, he should, it would seem, reckon 
his risk gain as compensation for the hazardous capital use — an- 
other form of risk interest. The losses of an enterprise must ordi- 
narily be paid out of the operator's wealth. Profit makers pay 
losses, when losses come, in the capacity of wealth owners and not 
of mere operators. 

But it has still to be recognized that the thing at hazard is not 
necessarily and solely the capital invested. The operator may, 
indeed, be investing nothing but his time and effort ; or his hazard 
may be such as to extend no further than the value of the time and 
effort devoted by him to the enterprise. 

There is, then, room for a concept of risk wage; and for this 
there could be no vahd objection to the term 7-isk profit, were the 
term profit not already overweighed in point of duties and over- 
clouded with accumulated ambiguities. 

Risk interest, then, should be extended to cover not merely the 
hazard compensation of actual lenders, but also compensation for 
the hazard of him who adventures his own resources under his 
own management.^ 

1 Cf . Veblen, Theory of Business Enterprise, pp. 120-130, as 
to the difficulty of finding a time unit for the hazards and gains 
of high finance. 



404 THE ECONOMICS OF ENTERPRISE 

Social welfare, proceeds, and profits. — The question remains 
whether the term profit shall serve (1) merely for exceptional, un- 
classified, irregular gains — conjuncture profits as they have sometimes 
been called -^ or whether, on the contrary, the term should stand 
(2) for the broader notion of compensation for the independently 
working human factor in production, or (3) for the still broader notion 
of compensation for the independent human factor in the quest 
for gain. 

For it must be noted that here as elsewhere there is danger of 
confusing the socially productive aspects of business with the com- 
petitive and gain-maldng aspects. Number (2) would conceive 
profits as compensation for independent productive activity, and 
would thus make no place for a large part of what fall under the 
general head of conjuncture gains, but would stand, rather, as an 
opposed and alternative notion. Number (3), the competitive 
view, would harmonize (1) and (2) by including them. 

It has been the writer's preference to use the term profit in this 
third sense as denoting, that is, the compensation falling to inde- 
pendent business activity after such apportionment as is possible 
has been made for rent, interest, wages, and other outlays. In this 
sense, profits stands as merely one form of the remuneration of labor 
and is thereby a subhead under the broader interpretation of the 
term wages. ^ 

• Profit, as a form of wages, then, points to gain without the in- 
tervention of an employer ; it is, then, remuneration to the entre- 
preneur for entrepreneur activity as such. This profit goes, no 
doubt, to him who takes the risk, but does not, therefore, go as 
compensation for the risk or in proportion to it. It is, indeed, in 
the very nature of entrepreneur labor that it is the labor of the risk 
taker. 

Speculation, gambling, and underwriting. — There are, 
however, gains which are made through the business of carry- 
ing risks. This is the field of underwriting, of which fire, 
life, and accident insurance are the most familiar illus- 
trations. The underwriter's gains accrue through the mar- 
gin of difference between the cost of carrying risk and the 
compensation which is received through the market pre- 

^ And wages, it should be remembered, are not derivative solely 
from technological or other productive activity. I may pay my 
wage earner to destroy your property or to besmirch your reputa- 
tion. 



RISK, PROFIT, AND INTEREST 405 

mium upon risk. From the point of view of the under- 
writers, indeed, the risks mostly merge into the certainty 
of the general average. The wider the field, the smaller the 
risk. Toss a penny once and the outcome is entirely one 
of chance — even chances of heads and tails : but in an in- 
finite number of cases the chance disappears in the certainty 
of an even number of heads and tails. Insurance is, then, 
theoretically a traffic in risk without risk to the traffickers. 

From the point of view of the insured, also, insurance differs 
from gambling by the fact that insurance is a contract under the 
terms of which no gain, but only indemnity against loss, is possible. 
Gambling may be a fair contract, but must be — if a fair contract 
— • a foolish contract. The law of falling utility applies for each in- 
dividual to his income or to his money, for the very reason that it 
applies to the various different things for which income or money 
may be spent. To add $10 to the $100 that one has, is a gain 
smaller than would be the loss suffered by losing $10 out of the same 
$100. The gain is one that attends the 11th ten dollars ; the loss 
is the loss of the 10th ten dollars. But the insurance contract 
precisely reverses the gambling principle and deduces advantage 
from this law of falling utiUty. If you were assured of three meals 
a day for the next month, but faced one chance out of a hundred 
of having nothing to eat the following month, you could well give 
up one of the three meals for the first month in order to be guar- 
anteed against starvation for the second. This would be to pay 
33 times the mathematical value of the risk. So, with a $10 pre- 
mium upon a $1000 fire policy, the policyholder gives up his mar- 
ginal and relatively unimportant $10 of income in order to be 
guaranteed against the possibility of the loss of units of much 
higher rank. The aggregate significance of the entire $1000 is 
indefinitely more than $100, times the importance of the marginal 
$10. If, therefore, there be one chance in 200 of losing the whole 
$1000, the policyholder may well afford to pay ywu of $1000 to be 
protected against this chance. 

The gains of underwriting are, then, due to the difference 
between what it costs to carry a risk and what it is worth to 
get it carried. But it does not follow that the gains from 
underwriting are properly to be called risk profits. As well 
call the gains from calico manufacturing calico profits, or 
from fishing, fish profits. 



406 THE ECONOMICS OF ENTERPRISE 

In point of fact, risks divide into two classes : (1) where the 
danger of loss has no correlative aspect of possible gain, and 
where, therefore, the problems are solely (a) as to whether 
the hazard is one that can be shifted, and (b), if so, who shall 
carry it — cases which easily lend themselves to the business 
of making gain off the carrying of others' risks — and (2) 
where the possible profit and the possible loss are somehow 
in the market equated one against the other : these are cases 
which lend themselves readily to speculation and to gambling. 

The causal relations of risk to business gains having now 
been discussed, the next chapter will in large part concern 
itself with gathering together the scattered threads of the 
interest argument. Nothing new will be attempted further 
than to make clear that there can be no one world, or even 
market, interest rate, — a fundamental rate of net or pure 
interest variously modified by additional charges for various 
times, places, and conditions. The fact will, on the contrary, 
be shown to be that there is not even one rate for any one 
town for any one day. It was, indeed, as leading up to 
this point in the analysis, that the discussion of risk was 
undertaken in this chapter. 



CHAPTER XXI 

CAPITALIZATION AND DISCOUNT RATES 

Exchange media. — The current circulating medium includes 
— as we have seen and shall later more fully see — not merely all 
forms of money, but those credit substitutes for money in actual 
employment as media of exchange. Money and circulating credit 
combine to form the aggregate of currency — the aggregate cir- 
culating medium. The two together make up the volume of sus- 
pended purchasing power in society. Any commodity sold by its 
owner places him in command of this currency, this suspended 
purchasing power. This suspended purchasing power is, in turn, 
available for acquiring immediate or durable consumption goods, 
for investment in gain-promising dii'ections — -productive goods or 
what not, — or for lending to borrowers. The loan fund of any time 
is that part of the aggregate fund of suspended purchasing power 
which the possessors are disposed to lend. This loan fund we 
have seen to be the subject of capital borrowing for interest. 

It is, then, evident that the activities of deposit banking insti- 
tutions are closely connected with the volume of loan funds ex- 
isting at any particular time. Any further examination of the bank- 
ing function is not possible here. But so much as this is evident : 
The discount of a customer's note is an operation by which the bank 
furnishes the customer with a demand upon itself available as im- 
mediate purchasing power. He uses this purchasing power by 
assigning to some one else his right of immediate demand against the 
bank. The result, then, of discount banking is to put into circula- 
tion a great total of currency. The deposit credits thus created are 
loan funds in the hands of the holders to the extent that this use 
of them is chosen. 

Whether or not it be decided that the lending function of the 
banks is itself an influence upon the interest rate, or rates, of the 
market, and whether, if so, the influence in this direction is effective 
not merely temporarily, but permanently, or whether, on the other 
hand, the only long-time effect is upon the general price situation 
need call for no further discussion. This much is at all events clear : 

407 



408 THE ECONOMICS OF ENTERPRISE 

deposit currency constitutes a large part of the existing loan fund 
of any particular time. 

Hoarded Funds are Capital. — Whatever currency an indii'idual 
receives, either as current income or as the sale price of existing 
possessions, he may dispose of in various ways. So far as he directs 
his funds to provision for the future, he may accomplish his end by 
merely hoarding the money, or he may invest it in long-time con- 
sumption goods, or in production goods, or he may lend. In any 
case, his savings are part of his private individual capital, no matter 
what disposition the borrower may make of such of these funds as 
he borrows. 

Private capital and social wealth. — But it has already been 
made clear that there is no necessity that the increase of the private 
capital of the lender involve an attendant increase of social capital. 
The loan may have been used by the borrower for consumption pur- 
poses, spendthrift or other. Or the borrowing may have been by 
the State for the financing of jingo wars or of administrative deficits. 
In short, there is no necessary equivalence between the totals of 
social capital and of private capital. It is true that in some cases 
the capital credited to one individual is a debit elsewhere. But it 
has been pointed out that this is not necessarily the case — that 
government debts are commonly demands against the earning power 
of future generations. Likewise, the capitalized value of a franchise 
or of a monopoly or of a patent — another sort of a monopoly — 
appears nowhere as a debit against individual wealth. 

The ambiguities in the term capital are especially dangerous in 
this connection. Savings are private capital; but whether they 
ever come to express themselves as an addition to the total social 
capital depends upon how the savings are used. The saver com- 
monly lends his savings. He is not a capitalizer from the social 
point of view. And the savings which he lends, even though not 
spent by the borrower for consumption purposes, may be used by 
the borrower in the creation of that which, though capital for his 
own purposes, is not capital in any social accountancy — e.g., in 
the creation of a monopoly, or in the advertising expenses of a 
publicity campaign. 

Saving and growth of social wealth. — The truth is, then, that 
saving may be a condition precedent to the increase of either private 
or social capital, but that social saving involves as a further step 
the direction of the savings to the creation of social capital. Savings 
in the form of mere purchasing power are mere rights of control 
over wealth or labor. Whether social capital shall emerge must de- 
pend upon the direction of the control. The decision commonly 



CAPITALIZATION AND DISCOUNT RATES 409 

rests with the borrower. Banks create — at least for temporary- 
purposes — these rights of direction. Their chief function is in 
the redistribution of purchasing power. This redistribution is 
effected through supplying to the borrower a credit which, entering 
into general circulation, is an item of currency expansion. 

The amount of loan fund in any society or in any market is, there- 
fore, more a question of the organization of the credit situation and 
of the distribution of the individual wealth in society than of the 
aggregate social wealth. The great centers of loan capital are the 
banking centers. 

Not one but many interest rates. — We have also seen that over 
against the aggregate supply of loan funds are the various demands 
for loans, for all sorts of purposes, with all degrees of hazard to both 
lender and borrower, and for various periods of time. It is, then, 
inevitable that there should be many differences in interest rates, 
not merely at different times and in different districts and countries, 
but in each different district and center, and for different classes of 
borrowers, and for different borrowers in each class. Some money 
lenders consent to lend part or all of their funds for short terms only. 
Some of this short-term lending is upon demand — call loans, as 
they are technically named. In this last case the rate is commonly 
very low. Loans, also, for long-time investment are likely to 
command low rates, though not so low as call loans. Excepting 
on call loans, bank rates of interest rule appreciably higher than 
other rates. One reason for the higher bank rate is in the conven- 
ience to the borrower ; another reason is in the administrative and 
clerical expenses of the banking business. This fact of an expense 
loading in the bank rate is probably the main explanation for the 
higher charges in rural communities where banking operations are 
of relatively small magnitude. 

Rates and capitalization. — Evidently, then, there is no 
one market rate of interest, even in any particular locality — 
still less for different localities. There can, then, be no one 
market rate underlying different individual bids in the capi- 
talization process or employed as the basis of them. It has, 
indeed, been made clear that each individual has his indi- 
vidual and peculiar process of arriving at his possible bid 
for any desirable good, and that any discount rate to be 
ascribed to him must resolve itself commonly, though not 
of necessity, into a mere general comparison of the desir- 
ability of the proposed investment as against the most de- 



410 THE ECONOMICS OF ^ ENTERPRISE 

sirable alternative method of using the purchasing power at 
his disposal. 

The relation, then, of the rate at which, if one borrows, he 
must borrow, and of the rate at which, if one lends, he must 
lend, to his individual attitude toward any proposed invest- 
ment, is obvious. Clearly he does not accept any one of all 
the different market rates as liis basal rate in the discount 
process leading to his bid. Doubtless, however, whether 
as the cost of his borrowing, or as opportunity for his lend- 
ing, these rates have the closest possible relation to the fixa- 
tion of his bid. 

The circuity in the capitalization doctrine. — And just 
here, also, is the exit from the logical circuity which has 
long perplexed the analysis of capitalization. The rent 
problem is easy enough of solution, as the mere market 
value of the use of durable wealth. But the rent problem 
and the interest problem are not one and the same problem. 
There is no telling what interest a rent-bearing property 
earns until the value of the property is fixed. Rent is in- 
terest when, and only when, it is expressed as a percentage 
of the price of the property. But how arrive at this 
price otherwise than by an appeal to the very interest rate 
which only a moment since purported to be deduced from 
the ratio between the total value and the value of the time 
use? 

Different men, different rents, different discount rates. — 
The truth is, however, that there is no such interest rate. 
There is only the earning power of different investments, 
all of which, under the competitive bidding of investors, come 
to offer in any district not widely different rates of return 
for similar grades of risk and for similar periods of invest- 
ment. But note that the field of possible investment is not 
confined to the purchase of durable goods — rent-bearing 
properties. There are in addition all sorts of pecuniary activ- 
ities, speculation, merchandising, advertising, promoting, 
and the various professions — all of them calling for funds. 
So far as any interest rates are relevant to the capitaliza- 
tion process, they are the rates which together equate 
the whole volume of investment opportunity co the aggre- 



CAPITALIZATION AND DISCOUNT RATES 411 

gate supply of loanable funds. Interpreting abstinence to 
mean no more than the disposition not immediately to con- 
sume, interest rates are the points of adjustment between 
the supplies of funds and the different borrowing demands. 
The bid of any individual for any item of durable property 
is concerned with interest rates only as the cost of the fund 
which he invests or as alternative opportunities of gain in 
the investment of his funds. The interest rates derivative 
from the total situation come, then, to bear, through com- 
petitive bidding, upon the market price of each particular 
item of property in such fashion as to equalize the objective 
and impersonal advantages attaching to one as against 
another property. 

The examination of interest and of the connected problems 
having been completed, the discussions of the next chapter 
will return to a consideration of some of the more general 
problems of theory, and especially of the doctrines holding 
that there are only three classes of productive factors, land, 
labor, and capital ; that there are only four classes of cost 
of production, rent, interest, wages, and profits ; that, as 
costs of production are limited to four, so distributive shares 
are limited to the same four ; that these four distributive 
shares are assigned exclusively to the three productive factors, 
land, labor, and capital ; and that the distributive process 
involved in entrepreneur production accounts for the dis- 
tribution of the aggregate income of society. 

It will be shown that, on the contrary, the costs of pro- 
duction in actual business are legion ; that many of them 
are not rationally to be classified under any one of the four 
heads of wages, interest, rent, and profits; that many of 
these costs are expended in directions not rationally to be 
classified under any of the three heads of land, labor, and 
capital; that many of the costs are expended for things 
which are not factors of production at all in any mechanical 
or industrial or technological sense, and which are actually 
not classified as any one of these in traditional economic 
discussion ; that many of the costs are expended in directions 
actually classified as technological when they really are not 
so ; and, finally, that the factors which are accurately techno- 
logical are not susceptible of classification into the categories 
of land, labor, and capital, or into any other definite cate- 



412 THE ECONOMICS OF ENTERPRISE 

gories, since in degree and in kind, the varieties are beyond 
enumeration and are in constant change. 

The argument of the chapter will therefore strongly 
reenforce the conclusions of earlier chapters condemning all 
attempts to distinguish land from other instrumental goods 
in relation to cost or price or interest or capital. 



CHAPTER XXII 

CLASSIFICATION OF THE FACTORS OF PRODUCTION 

The scope of cost outlay. — We have seen that the entrepre- 
neur, in producing goods for gain, apportions his outlays into a 
variety of investments — labor, land, machines, tools, raw materials, 
seed, light, heat, power, patents, royalties, taxes, insurance, advertis- 
ing, transportation — and so on without limit ; that all of these 
different outlays are equally costs in the sense of price expenses 
submitted to in the prospect of price returns to come ; but that 
these different outlays in price do not complete the catalogue of 
costs ; there must be included a price charge for the entrepreneur's 
own labor — his necessary profits, in view of his alternative open- 
ings and in view also of any exceptional burden, or stress, or disre- 
pute, or risk of bodily harm, involved in the undertaking ; that, 
together with these risks and resistances, there must be included 
charges for those hazards of pecuniary loss which he is either unable 
or unwilling to get carried for him by others ; and that, in addition, 
he must compute not only his interest outlays upon borrowed funds, 
but also a time charge upon the aggregate investment of his own 
resources in land, equipment goods, finished products in stock, and 
in credits and general operating funds. 

The objects of outlay : Bases of distribution. — What, 
then, can the economists mean in confining costs of pro- 
duction to wages, profits, rent, and interest, and in reducing 
all the different factors of production to the corresponding 
categories of labor, entrepreneurship, land, and capital? 

But this fourfold classification of costs presents, at its 
next step, still greater perplexities : Recalling that costs to 
the entrepreneur — some of his costs, at any rate, like rent, 
wageSj and interest — are distributive shares to the recipi- 
ents, we arrive at this astounding doctrinal climax : that 
the entrepreneur process decides and apportions the dis- 
tribution of the entire income of society, and that the aggre- 
gate social product is accounted for and distributed under 

413 



414 THE ECONOMICS OF ENTERPRISE 

the four entrepreneur categories of wages, profits, rent, and 
interest. 

The traditional view examined. — Not at all denying that 
wages, rents, time discounts, and necessary profits are cost 
items — when they are incurred by the entrepreneur in the 
productive process — or that as costs to him they are dis- 
tributive shares out of the value of the products sold, it is 
still to be remarked that there are capital funds as well as 
capital tools, monopoly capital as well as machine capital, 
franchise rents as well as land rents, publicity investments 
as well as investments in salesmen's salaries. Can all 
these different outlays be distributed within the rent, 
interest, wage, and profit classifications, and all the bases of 
these outlays be distributed as land_ or labor or capital? 
And even admitting this to be possible, are all distributive 
shares in society to be so accounted for? What, for ex- 
ample, about interest upon consumption loans, or about 
gains from tax farming contracts, or from patents or fran- 
chises? True, all these investments are capital, but they 
are evidently not capital in the sense of factors of production 
serving as auxiliaries in the process of making things. And 
how about countermoney and balances at the bank? True, 
these also help ; these also are capital ; but not in the tech- 
nological or mechanical or industrial sense, according to 
which machinery is capital, and according to which land and 
labor are factors of production differing each from the other. 
And in what classification — land, labor, or capital — shall 
the money and the bank balances and the patents and the 
franchises be distributed ? Surely each and all cost money ; 
but so does land. Surely they require capital to buy them 
or to hire them ; but so does land. And of what sort, after 
all, is this capital that is invested in them? Is it machinery 
as distinguished from land ? or capital in any sense to identify 
it with machines and to distinguish it from labor or land? 
It is, in fact, capital, but precisely that form of capital which 
is invested indifferently in lands and machines and rents 
and interest and wages. It is capital in that private and 
acquisitive sense that has nothing to do with capital as a 
factor of production, and is, indeed, irrelevant to all tech- 



FACTORS OF PRODUCTION 415 

nological classifications. Upon the basis of these nontech- 
nological forms of capital, as well as upon the technological 
forms, the distributive process partly takes place. 

By what strange process of reasoning, then, were this four- 
fold classification of factors and these derivative doctrines 
of cost and distribution arrived at ? 

The traditional view collective and genetic. — But the 
case will not look so strange if regarded in the large and from 
the social point of view. The wealth of any isolated indi- 
vidual, his total of belongings, must be made up of the orig- 
inal environment plus what he has added to it. The pro- 
ductive power which he wields rests in part upon his own 
personal efficiency, the organism side ; in part upon the pro- 
ductive efficiency of his possessions, the environment side. 
In the nature of the case he can have no other sources of 
product. And precisely so with society taken in the aggre- 
gate. All production must be due to human energies in 
conjunction with human possessions. Therefore, all prod- 
uct must be (1) returns upon labor, that is, wages or profits, 
or (2) returns either on (a) natural environment, that is, 
land rents, or (b) artificial environment, other rents. 

Could anything be simpler? or more logical? or more 
philosophical in its grasp of fundamentals? But, unfor- 
tunately for theorists and theories, we are in a competitive 
society, into the language of which the collectivist doctrine 
need not translate, and upon the phenomena of which the 
collectivist analysis may throw scant light. We are in a 
society in which the property bases of income are something 
more than lands and ma,chines, in which the processes of 
production are something more than mere technology, 
in which the products are more than material things. We are 
in a regime of price for individual gain, where patents and 
franchises and monopolies are capital ; where burglars' 
jimmies are production goods ; where advertising is one of 
the costs of product, insurance is a necessary business, gam- 
bling a trade, speculation a career, circumventing the law a 
profession ; where products are merely salable things, — 
meat, bread, and cloth, truly, but likewise stocks, offices, 
talk, music, moving pictures, acrobatic antics, spiritualistic 



418 THE ECONOMICS OF ENTERPRISE 

revelations, quack diagnoses, phrenological charts, and 
humbugs in general ; where restriction of production is 
often more gainful than technological production; where 
wages may be had for demoralizing the public taste, or for 
slandering the opposition candidate, or for corrupting the 
judge or jury or legislature, or for poisoning a neighbor's 
well or cow, or for setting fire to a competitor's refinery. 
In short, we are in a competitive society, most of the serious 
problems of which sum up into one great and inclusive 
problem, how to limit the receipt of private income to the 
rendering of social service. 

Traditional view technological, but untrue to technology. 

— None the less, there are many undertakings in which the 
entrepreneur is engaged in the technological process of plac- 
ing material things upon the market. He is employing 
laborers and different sorts of instrumental goods, e.g., land, 
machines, fuel, raw materials. Here are various factors 
of production engaged in a technological process, cooperat- 
ing under the entrepreneur's direction in the putting forth 
of a joint product, and sharing somehow in the returns from 
that product. Perhaps, also, the entrepreneur, from whom 
as an employer the different factors receive their distributive 
shares out of the product — shares which to him are costs — 
is himself taking part as a laborer in the industrial or me- 
chanical process. 

Here, surely, there arc, in the technological sense, factors 
of production which are recipients of distributive shares 
by title of contribution to a joint salable product. But 
will these factors classify as labor, land, and capital? and 
will the remuneration distribute into the corresponding cat- 
egories of wages, profit, rent, and interest ? Are there not 
other factors in the process? and are there not other dis- 
tributive shares than the traditional four ? Even in a purely 
technological enterprise, is it possible to distribute the fac- 
tors into this three- or four-fold classification, with their 
respective remunerations falling into the corresponding 
categories? How many factors of production are there? 
and what are the principles of likeness and of difference ? 



FACTORS OF PRODUCTION 417 

These questions were in considerable part answered in 
Chapter XI, where the distinction between land and capital 
was considered. It was there shown (1) that no one of the 
distinctions commonly /'urged — and commonly applied all 
together — is logically "t;enable and practicably applicable, 
and (2) that, in a competitive entrepreneur economy, no 
one of these distinctions would matter, even were it tenable. 
At the most, land would rank as one among many different 
forms of capital. 

Many kinds and degrees. — But it still remains true 
that, from the technological point of view, there are many 
classes of goods differing, for entrepreneur purposes, some- 
times radically in kind, and commonly differing more or 
less in degree. That there are differences in kind is evident : 
In market gardening, as in grain production, there must 
be seed to go with the land and labor to go with the machines, 
no matter how dear or how cheap the land or seed or labor 
or machines may be. But along with these differences in 
kind there go differences in degree. More machinery or 
more fertilizers or more labor will in some measure make 
good the lack of land. If wages are high, the pressure is 
strong for the introduction of machinery; if machinery is 
dear, labor will be the more employed in its stead. In coun- 
tries of low wages, as, for example, in India or in Mexico, 
the entrepreneur finds the machine method of production 
the' more expensive. In a slave-holding society, labor is 
likely to be used in place of the more expensive labor-saving 
appliances. But despite the fact that, with every change 
in the relative prices of factors, substitutions and redis- 
tributions of factors are taking place, it is still true that the 
principle of substitution is not indefinitely applicable. There 
are margins of choice in the application of expense to the 
various factors — margins that are constantly shifting with 
every change in the arts of production and in the relative 
prices or hires of the factors. But, in any given situation, 
the limit of practicable substitution is easily reached, though 
this limit rnust be differently drawn by different entrepre- 
neurs. Were, indeed, these substitutions possible of indefi- 
nite extension, if machinery costs could be fully and entirely 
2e 



418 THE ECONOMICS OF ENTERPRISE 

substituted for labor costs, if additional labor could avail 
fully to atone for the shortage of land, if machines did not 
require attendance, and if horses did not need drivers, there 
could never set in any relative shortage of factors, and no 
disadvantage could ever attach to any possible proportion- 
ment of the different productive factors. Were it, for 
example, always and without disadvantage possible to in- 
crease the labor investment upon any given piece of land, 
no land shortage could ever manifest itself, and rent must 
disappear. If outlays for more machinery, or for more 
expensive machinery, could go on indefinitely without the 
call for more labor to go with the machinery, — if, that is to 
say, machine expenses could fully and everywhere take the 
place of labor expenses, — developing invention would 
finally deprive labor of all employment. 

Evidently, then, differences of kind exist side by side with 
differences of degree. Were differences in degree not pres- 
ent, substitution would be impossible. And were there no 
differences in kind, there could never be anywhere a disad- 
vantage from an increase of expense upon a fixed supply of 
land, or any loss from 20 laborers working at one loom, or, for 
that matter, any reason why an indefinite number of wagons 
should not dispense with the need of horses and drivers. 

Technological differences in kind, it must be admitted, 
are in many cases so marked as almost to prohibit the possi- 
bility of substitution. But distinctions that are technological 
are not necessarily economic. (See Chap. XI.) And it 
must now be pointed out that these actual, important, and 
obvious technological distinctions between the different bases 
of production not only fall short of justifying the threefold 
classification into land, labor, and capital, but really extend 
so far as to cancel all possibility of this classification. It was 
earlier shown that the differences and specializations are 
in fact as marked between one item of land and another, or 
between one item of capital goods and another, or between 
one laborer and another, as between capital goods and labor, 
labor and land, or land and capital. (See Chap. XI.) 

Number of classes indefinite. — The truth is, therefore, 
— and it must be met and accepted, — that if the factors 



FACTORS OF PRODUCTION • 419 

of production are to be distinguished according to techno- 
logical tests — as, for certain purposes, they clearly must 
be — it will immediately become necessary to recognize 
not two or three, but countless classes and varieties of pro- 
ductive factors. There are lands especially adapted to dif- 
ferent crops — some of these lands adapted only at a great 
loss to any other crops — and lands of different grades for 
all of these different adaptations. And there are timber 
lands and mining lands and grazing lands and hunting lands 
and fishing waters. Other lands, again, are good for nothing 
but for building purposes, others good for nothing but 
wharves. And among the building lands there are lands for 
shops, for residences, for factories, for warehouses, and for 
railroad yards. And many of these purposes are not even 
in the widest sense to be regarded as technological. 

And so with machines : There are talking machines, flying 
machines, spinning machines, sewing machines, mowing 
machines, graveling machines, and fishing machines — ma- 
chines of many different sorts and grades, for watch-making, 
for cigarette making, for milking, for massage, for music, 
for adding, for multiplying, for tree cutting and for leg 
cutting, for killing, and for resuscitating. Why rank all 
these as technologically one, and term them all capital purely 
by reason of their alleged industrial functions? 

Numberless and changing interrelations : Machines. — 
And not merely this : there are all sorts of technological 
relations among machines and appliances — relations of 
substitution and of competition, of interdependence and of 
mutual need. The instances are many in which one kind 
of a machine takes the place of another, competes with it, 
limits or changes its field of application, sends it to the 
scrap pile. Electric lights are displacing lamps and gas and 
coal and refining plants. As the cable car displaced the mule 
car, as the automobile is displacing the carriage and the 
street car, as the electric car is displacing the locomotive, 
so the aeroplane may some day take the place of all the others. 
Possibly not less numerous are the cases where the existence 
of one machine creates a field of uses for another machine : 
recall how the power loom waited upon the spinning jenny. 



420 THE ECONOMICS OF ENTERPRISE 

"With labor. — The same variety of relations — now of 
substitution and now of interdependence — is found among 
laborers relatively to one another and among lands relatively 
to one another. More masons call for more hod carriers, 
more carpenters for more masons, more day laborers for 
more supervisors, more agriculturists for more artisans — 
and so on without limit. On the other hand, the more 
typists, the fewer amanuenses ; the more linotype opera- 
tives, the fewer typesetters ; the more chauffeurs, the fewer 
coachmen and cab drivers. As the physician has taken the 
place of the magician, so the surgeon may some day dis- 
place the physician — or the other way about — or the 
bacteriologist displace both. Why, then, classify all labor as 
one? 

Likewise with land. — The coal lands displace the wood- 
lots. New fisheries would probably lower the demand for 
pasture lands, and perhaps intensify the demand for cereal 
lands. More agricultural lands will call for more packing- 
house sites, for more railroad rights of way, for more city 
terminals, and for more town lots for city dwellers. 

Interdependences and substitutions between classes. — 
That these relations of mutual need on the one hand, and of 
competition: and substitution on the other, exist not merely 
within each of the three traditional classifications, but still 
oftener and more intricately across the lines of the tradi- 
tional classifications, is still clearer and is still more disas- 
trous for these classifications. Some machines take the 
place of labor ; other machines offer a new demand for labor, 
either in the making or in the operating or in both. Not 
rarely a new process requiring little or no machinery, but 
only or mostly labor, displaces expensive capital appliances. 
With wireless telegraphy, for example, the last ocean cable 
may have been laid and the existing cables be fated to 
abandonment. 

Or, again, the discovery of more productive varieties of 
grain, or the development of new methods of cultivation, like 
subsoiling or bacterial inoculation, may throw much of 
the poorer land out of cultivation. Or more plows — a 
change in capital equipment — may do the same thing. 



FACTORS OF PRODUCTION 421 

Better technique of transportation, i.e., better labor, or better 
transportation equipment, i.e., better machinery, make 
accessible lands previously inaccessible. Economically] there- 
fore, though not geographically, they create land. "~^nd 
meantime they throw out of cultivation the poorer grades of 
near-by land. (See Chap. XII.) 

The classifications indicted. — It is, then, evident that 
the threefold classification of productive factors fails (1) 
in excluding from capital much that is clearly capital, e.g., 
land, (2) in including within capital only a small share of 
the remaining things that are equally capital, e.g., credits, 
franchises, patents, etc., (3) in attempting to base the classi- 
jQcation of factors upon purely technological grounds, (4) 
in constructing upon these grounds a classification that 
inadequately reports — ■ and mostly misrepresents — the 
actually existing technological relations, (5) in presenting a 
classification which, with the continuous and progressive 
changes in technique, must require for each different entre- 
preneur a constant redistribution of the subject matter classi- 
fied, (6) and in imposing the logical necessity of carrying 
so far the construction of new classes and subclasses as 
finally to leave the case precisely where it was in the begin- 
ning — in substance, an attempt to classify what will not 
classify, or will classify only upon lines which are constantly 
changing. 

This chapter having emphasized the fact that there are 
countless technological, or mechanical, directions of cost 
in the productive process, and countless corresponding bases 
of costs, and that there are countless other directions of 
cost, some resting upon bases that are not technological 
or mechanical in any sense — the next chapter will examine 
the proportions in which the different factors and different 
bases of cost are best employed (In production. It will be 
shown that the Law of Diminishing Returns as applied to 
land is merely one aspect or application of a law applicable 
over the entire field of production and of gain, and appli- 
cable equally to all the different bases of cost — which 
broader law will be termed the Law of the Proportion of 
Factors; that this law has social as well as competitive 



422 THE ECONOMICS OF ENTERPRISE _ 

renderings; that in either rendering it has both static and 
dynamic aspects — the static aspects referring merely to the 
current working of things under any assumed set of condi- 
tions, the dynamic aspects referring to the trend of things, 
to certain or probable changes in the conditions, and to the 
effects which must attend these changes ; that, in all com- 
petitive renderings, the Law of Proportions means merely 
that for purposes of gain the entrepreneur must rightly 
apportion his price costs among tlieir different bases, techno- 
logical or other, or must suffer in his price gains ; that, in 
its social bearings, the law points merely to the effects upon 
the aggregate social product which must attend any excess 
or defect in the relative supplies of technological factors. 

Examination also of the forces and tendencies indicated 
under the Law of Licreasing Returns will advise its renaming 
as the Law of Advantage and Size. 



CHAPTER XXIII 
LAWS OF return: profitable proportions: profitable 

SIZE V -4 

The industrial facts. — That, as men acquire larger knowl- 
edge, strength, and technical skill, they become more effective 
producers of wealth ; that with larger and larger supplies 
of any consumable good, there must go a smaller importance 
attaching to each successive unit of supply ; that, upon 
any given area of land, successive increments of product 
are obtainable only on terms of increasing difficulty per 
unit of product ; that, in many lines of production, the 
greater business has, in point of economies of production, 
the advantage over the smaller business — are propositions 
no one of which is markedly economic or technical in import, 
or of a nature to present overserious difficulty of compre- 
hension, or of a character to offer especial temptations to 
controversy. 

Not precisely so, however, for the same propositions as, 
after subjection to the necessities of economic analysis, re- 
interpretation for the purposes of economic investigation, 
and reformulation for the purposes of economic doctrine, 
they present themselves transformed and rearranged into 
the well-known " economic laws of return." 

The ultimate principle underlying what is commonly 
known as the law of diminishing returns, and underlying 
this law in all its different applications, is, when stated in 
its most general form, an almost self-evident truth, namely, 
that disadvantage attends any excess or defect in the supply of 
productive factors relatively one to another. This large gen- 
eral law we shall term the law of the Proportion of Factors. 
It affirms nothing more than the disadvantage from bad 

423 



424 THE ECONOMICS OF ENTERPRISE 

combination in all production and in all business under- 
takings. 

Social and competitive : Static and dynamic. — As is gen- 
erally true with economic principles, this law has its social 
and its competitive aspects. In its purely private and com- 
petitive form — as will later appear — it means not much 
more than that, in economic activities, as mostly elsewhere 
outside of the nursery, the asylum, and the poorhouse, "fools 
get the worst of it." But in its social aspects the law runs 
in terms more courteous. 

For society in the aggregate, the main significance of the 
law is found in the field of history or of prophecy — of ret- 
rospect or prospect. In this sense it is a law in social dy- 
namics ; it elucidates the economic bearing, upon society 
as a whole, of certain changes in the general situation : What 
effects must these changes have had? Or, taking place in 
the future, what will be their effects ? 

The general principle involved has, however, its static 
formulation : What is the present meaning of the existing 
relative supplies of productive agents and instruments? 

The social-static formulation. — It is evident that society 
may be badly circumstanced by virtue either of a scant 
aggregate^ equipment of productive instruments, relatively 
to the number of laborers, or of an equipment relatively scant 
in particular directions. And it is equally clear that the 
situation may be a fortunate one — for such members of 
society as there are — by the fact that the membership is 
a small one relatively to the supplies of land and other in- 
strumental goods. If the per capita equipment in lands or 
appliances is generous, the society, taken as an aggregate, is 
so far fortunate, — the average level of comfort is a higher 
level. 

The transition from the static to the dynamic aspect is easily 
made, — is indeed ahnost inevitable. Whatever is dynamic leads 
merely to a new appUcation of static doctrine. That is to say, in 
order to appraise the significance of the dynamic, there is always 
necessary another appeal to the static : only so is it possible to 
appraise the significance of the change. The dynamic aspects 
of any problem refer merely to the forces at work to make the situa- 



LAWS OF RETURN 425 

tion a new and different situation. But in each new situation there 
is nothing new but the situation : the static doctrine is still valid ; 
the problem in its setting of new terms remains in principle and in 
method of analysis the same problem. 

The social-dynamic formulation. — Society is advantaged 
by every change making for a more generous aggregate equip- 
ment of productive instruments relatively to the number of 
laborers or making for an equipment relatively more gen- 
erous in any particular direction. The social significance 
of this Law of Proportions is, therefore, — be it repeated, — 
mainly to be sought in the field of history or of prophecy. 

To illustrate : The Black Death in England may be taken to have 
swept away one half of the population of England, leaving, however, 
unimpaired the supply of land and of other productive equipment. 
It thereby became possible for the remaining population to enjoy 
the advantages of a better per capita equipment of land and ap- 
pliances. Conditions were favorable to the resultfulness of human 
effort. Doubtless there were also changes in the terms of the dis- 
tribution of this product among the different cooperating factors ; 
but with the purely distributive and competitive and individual 
aspects of the case this social formulation of the Law of Proportions 
is not concerned. 

And so, again, were the present population of the world to be 
doubled, all other things remaining the same, the per capita prod- 
uct of industry must suffer. 

Likewise, also, if a population remaining unchanged in point 
of numbers were to acquire a doubled per capita labor effectiveness, 
whether by improved technique or by development in strength, 
or in intelligence, or in intensity of effort, the social product would 
not thereby be doubled unless, together with this, there should take 
place a proportionate change in the supply of land and of other 
equipment. And all this means merely that if some, but not all, 
of the productive factors are doubled, the product will not fully 
double. 

It is clear that this social-dynamic aspect of the law in question 
was the sole phase with which Malthus was logically concerned in 
his formulation of the social menace of increasing population. For 
the purposes of Malthus' argument nothing need have been de- 
duced as to the bearing of expanding population upon land rents. 
Nothing was necessarily inferred as to the trend of wages relatively 
to the other distributive shares. Neither private ownership in 



426 THE ECONOMICS OF ENTERPRISE 

land nor private ownership in any of the productive equipment was 
necessarily assumed. The formulation was equally vahd for the 
collectivist or for the competitive society. The investigation 
bore solely on the ratio of product to population, — on the rewards 
of industry as over against the pain-costs or the time-costs. The 
product was regarded in the weight-and-tale aspect, or, at most, 
as reduced to some sort of utility denominator for average or social 
purposes. No suggestion of the competitive or of the market-value 
calculus was pertinent to the problem. 

The competitive formulation. — But in a society competi- 
tively organized the private and competitive value aspects 
of the Law of Proportions press insistently for hearing. In 
its most general and inclusive statement the competitive 
law runs in substantial parallel with the general social law : 
Disadvantage in price return accrues to the individual from 
any excess or defect in the relative proportions of his factors 
of production. This is the competitive and individual aspect 
of the law of the bad combination of factors. 

First, however, the static aspect. — The explanations 
for this badness of combination may be various. In one 
way or another the entrepreneur has unskillfully gone about 
his undertaking, has attempted to get on with too much 
or too little land, has oversupplied or undersupplied 
himself with machinery or with seed or with fertilizers, 
has hired too few or too many laborers or laborers of the 
wrong sorts or grades, or has not correctly proportioned the 
different grades to one another. 

But, even so, this static formulation has two important 
aspects, aspects only with great difficulty distinguished, 
aspects which, in fact, have never, in the history of Political 
Economy, been consistently distinguished, but which none 
the less make imperative demand for careful and consistent 
distinction : (1) The law may refer to purely technological 
considerations, to the fact, e.g., that in market garden- 
ing or in grain production there must be seed to go with the 
land, or that labor must stand in some sort of proportion 
to machinery, no matter how high the wage or how cheap 
the machinery ; (2) but, for ordinary competitive purposes, 



LAWS OF RETURN 427 

it is evident that a wise combination of factors must depend 
mainly upon the relative hires or costs at which these factors 
are to be had. This follows from the fact that all competitive 
entrepreneur computations, both of cost and of product, 
run in terms of price outlay as over against price product. 
No one combination of factors, therefore, can be asserted 
to be the best for purposes of the entrepreneur, and to be 
diverged from only with disadvantage, unless upon the 
assumption of an established relation of prices among the 
various factors employed. With each change in relative 
prices a new combination comes to be the best combination. 
It is, in fact, only by this dependence of the amount of the 
employed factor upon the price of that factor that the con- 
stant redistributions and substitutions of factors become 
possible. If wages are high, the pressure is strong toward 
the introduction of machinery; in countries of low wages, 
machinery is little called for ; if land commands high rent, 
it pays to increase the proportions of labor or of fertilizers 
or of implements. 

Rut, as we have already seen in an earlier chapter, these 
substitutions are commonly possible only within fairly re- 
stricted limits, and on terms of increasing difficulty. It is, 
indeed, because these substitutions are limited in their 
scope that it is possible for any factor to become relatively 
scarce and for the necessity to arise for the observance of 
due proportions among factors. If, for example, indefi- 
nitely more labor could be applied to a given area of land, 
without progressively meager returns, there could never 
be any such thing as a scarcity of land ; and land being plenty 
relative to the need, rent could never emerge. It is thus 
evident that the existence of rent, as a price fact, is partly 
conditioned on certain fundamental requirements in the 
technique of agriculture. 

Differences in entrepreneurs. — This dependence of one 
factor of production upon another, this impossibility of 
indefinite substitution, requires, therefore, that, in the 
competitive price process in which the factors are employed, 
the entrepreneur combine wisely the different factors. But 
precisely because the entrepreneurs are different one from 



428 THE ECONOMICS OF ENTERPRISE 

another, both in abilities and in financial resources, each 
different entrepreneur must have his one best, and different, 
method and proportion for the combining of the factors. 
Even if all farmers are equally skillful, this would neither 
require nor permit that they hire or buy the same quantity 
or kind of land, or manage their enterprises in precisely the 
same way. 

It is also clear that it is the possibility of the substitution 
of factors that presents to each entrepreneur his peculiar 
problem of how best to proportion the different factors in 
his enterprise, and requires also that each entrepreneur 
solve hisf'problem in his own peculiar and different way. 
And it is equally clear that there could be no problem of 
proportions for any entrepreneur, were these substitutions 
possible without limit. There is a partial independence of 
each factor, due to its possibility of substituting itself for 
the other factors ; but there is also a partial dependence by 
virtue of the limited possibility of this substitution. The 
technological relations are thus again shown to be funda- 
mental to the price relations. 

On the whole, however, it is evident that the more impor- 
tant technological relation between the factors is the rela- 
tion of interdependence ; each factor employs the other 
rather than takes the place of the others. Thus the supply 
of any one factor is, in a sense and to a limited degree, the 
basis of a demand for other factors to go with it. Machinery 
does not, on the whole, take the place of men, but calls in- 
stead for more men. Wagons would be useless without 
drivers, pastures without cattle, meadow lands without pas- 
ture, iron and iron mines without coal and coal mines, cars 
without locomotives, and so on indefinitely. 

But note again that there is nothing in all these relations to justify 
the threefold classification of productive factors. If human beings 
are to constitute one class, as distinguished from machinery con- 
stituting another, on the basis that each must have the other to go 
with it, — the complementary relation, — it is to be objected that 
men sometimes take the place of machines and are in turn often 
displaced by machines; constantly and extensively agricultural 
machinery is driving labor to the towns. Nor are the relations be- 



LAWS OF RETURN 429 

tween different laborers quite satisfactory as a basis for including 
all labor in one economic classification ; in the same field of employ- 
ment and in the same general grade of labor, laborers compete 
against one another ; laborers of different field or grades are demands 
for one another ; the more masons the more hodcarriers ; the more 
of the unskilled, the more overseers and supervisors — and so on 
indefinitely. So again, some machinery calls for other, and some 
displaces other. 

But, in other connections, all these interrelations have been suffi- 
ciently emphasized in earlier chapters — as has also the truth that 
both the complementary relations and the relations of substitution 
are constantly changing, depend at any particular time on^the par- 
ticular situation in point of technique, and have at no time atid^in no 
situation the slightest relation to the land-labor-capital classification. 
In any case, however, it is obvious that the necessity of abandoning 
this threefold classification of factors can tend in no way to impeach 
the Law of the Proportion of Factors as here presented, or to limit 
its scope, but must apply rather to support and to emphasize it and 
vastly to extend its scope. 

Confused formulations. — In the interests both of safety and of 
accuracy great care must be taken that all competitive formulations 
of the Law of Proportions run consistently in terms of price. For 
competitive purposes the following formulations are evidently 
wide of the point unless amended along the lines suggested in the 
brackets. " In agriculture ... by increasing the labor [expense] 
the produce is not increased [in price] in equal degree " ; i or "The 
appUcation of increased [expense for] capital [goods] and labor to 
land will add a less than proportionate amount to the [aggregate 
price of the] produce raised " ;2 or "Additional investments of labor 
[expense] and capital . . . yield a proportionate increase in [price] 
product " ; ^ or "In the extractive industries the continual investment 
of [capital in] labor and capital [goods] on any given tract of land will 
. . . yield a diminishing proportionate return [in price] " ;* or 
"After a certain point has been passed in the cultivation of an acre 
of land . . . increased applications of [expense for] labor and capital 
[goods] yield less than proportionate returns in [price] product " ; ^ 
or " Whenever double the amount of [payment for] exertion yields 
more than double the amount of [price] products, we are in the 

1 Mill, Principles of Political Economy, Book I, Chap. XII, See. 2. 

2 Marshall, Principles of Economics, 4th ed., p. 230. 

^ Bullock, Quarterly Journal of Economics, Vol. XVI, p. 475. 

* Ibid., p. 480. * Seager, Introduction to Economics, p. 114. 



430 THE ECONOMICS OF ENTERPRISE 

presence of the Law of Increasing Returns or Decreasing Costs. 
When double the [payment for] exertion just doubles the [price] 
output, we have the Law of Constant Returns or Constant Cost " ; ^ 
or "In the case of agricultural land . . . additional doses of 
[expense for] capital [goods] and labor will yield a relatively smaller 
[price] produce." ^ 

Land costs, labor costs, material costs, wage costs, and oppor- 
tunity costs, all require rendering over into the denominator of 
price or of entrepreneur capital, and must be set over against a total 
of price product before the so-called Law of Diminishing Return or 
any other law of return can come to be relevant to the entrepreneur 
computation. Land as superficies, plus labor, machinery, seed and 
fertilizers somehow aggregated, cannot be compared with weight- 
and-tale product, and still less with price product. 

Nor can any formulation be strictly to the purpose of the 
entreprenem* analysis, when the costs are duly aggregated into 
value and price totals, but are set over against mere quantity of 
product. Quantity of product appeals to the entrepreneur only as 
it may directly translate into price of product. And tliis, indeed, 
it may often do, but only on conchtion that the product of the 
enterprise is a relatively small one and the competitors many. 
But in any case the competitive law must be made exclusively a 
price law, either in terms or by interpretation. 

Inferences from the competitive-static law. — But what, 
now, is the significance of the Law of Proportions talien in 
the competitive and in the purely static sense? Does the 
law in any sense throw light on the determination of prices? 
No social law of return — whether static or dynamic — is 
relevant to the price adjustment. Nor, so far as we have 
yet gone with the competitive-static analysis, have we at 
all advanced ourselves for any purposes of the price problem. 
To assert that the less shrewd the entrepreneur in fixing the 
relative proportions of factors, the smaller will be his price 
product, does indeed vaguely hint of the profits accruing 
to him relatively to his competitors, — says in substance 
that here as elsewhere the unskillful man gets the worst of 
things, but malves no deliverance as to prices. True it is 
that, if entrepreneurs should become more capable in any 

1 Seligman, Principles of Economics, p. 250. * Ibid., p. 306. 



LAWS OF RETURN 431 

industry, prices might thereby be affected, but this is to 
smuggle dynamic facts into a purely static problem. 

Nor has any basis been so far offered for inferences as to distribu- 
tion, unless perhaps with this single reference to profits. We have 
only a greater or smaller total of price product relatively to the total 
of price costs, accordingly as the productive factors have been well 
or ill combined. But in this there is nothing to indicate whether 
wages will rise or fall, either absolutely or relatively to rent or in- 
terest, — nothing to show that rent will gain or lose in the total or 
in relation to any other distributive share. We have, in fact, arrived 
at nothing better than an entirely obvious conclusion as to the 
profits of entrepreneurs relatively to one another. 

More than a land law. — But, so far as the competitive- 
static law is valid and serviceable, — and for whatever 
purposes it is valid and serviceable, — it is obviously a law 
equally applicable to all the cooperating productive factors. 
It is not in any especial degree a law of agricultural produc- 
tion ; nor is it a law valid only by virtue of the presence and 
the use of land, and in the degree solely of this presence and 
use. 

Where, then, shall warrant be found for the doctrine — 
purely as a static formulation — that if land is relatively 
scarce, land rent must be high relatively to other costs? 
Or that if laborers ^are scarce, their wages are likely to be 
high? Or that a restriction of loan fund means high in- 
terest rates, other things remaining the same? Or that 
machine rents are commonly high if the particular kind of 
machine is difficult — costly — to obtain ? 

Doubtless all these propositions are valid; but for these 
particular and specific laws no justification has yet been given. 
And more than this, — the distributive analysis necessary 
to justify any one of these formulations is an analysis both 
difficult and delicate. All this, however, wall become clearer 
in our examination of the Law of Proportions in its fourth 
and last aspect, the competitive-dynamic. 

More than a technological law. — In view, however, of the ar- 
gument of the preceding chapter, some surprise and some protest 
may be expected at the prevailingly technological emphasis so far 



432 THE ECONOMICS OF ENTERPRISE 

given to the law of proportions. But, in fact, no criticism was there 
directed against the recognition, in economic discussion, of these 
technological relations, but only to the recognition of these relations 
exclusively. No question was there made or is here made that 
technological aspects are important in most productive enterprises 
— ■ in preparing stocks for the market there must obviously be print- 
ing presses — but it was there pointed out, and must here be em- 
phasized, that technological factors in production are not the only 
factors involved, that there are other technological factors than land 
and machinery, and that the threefold classification does not ten- 
ably classify even such technological factors as it includes. There 
are, in fact, many sorts of each of these three ; there are factors, 
with their attendant costs, which have small technological signifi- 
cance ; and there are others which have none. Even in farming, 
with its obvious land and machines and labor, not only are there 
different kinds of machinery, different grades and sorts of labor, 
different qualities of land of differing applications, but there are 
also risks of hail and drought and disease and fire and financial 
stress. There are freights and taxes. There are fertilizers and in- 
secticides. There are secret formulae — at a dollar each — for 
making hens lay and for curing foot-rot in sheep. There are ad- 
vertising outlays to the end of marketing a special brand or strain 
of fancy stock. There are trips to town and dues at the Grange. 
There are subscriptions to agricultural journals, and contributions 
to the traveling agent who never delivers the goods. And all of 
these are costs incidental to the business, and incurred in the process 
of getting grain and cattle and eggs upon the market. 

But none the less, all the while, this law of proportions holds, 
^abating neither jot nor tittle of its meaning and force. The out- 
'iays for insurance must be appropriate to the size of the business, 
"the smaller, relatively, as the risks are widely scattered, the larger 
as the enterprise is not financially equipped or organized to meet 
sudden strains or to redistribute its resources promptly. As the 
barns and sheds must be in due relation to the working cattle, the 
dairy animals, and the farm machinery, so the different laborers 
must be fitted to the various tasks. Likewise the overhead expenses 
of insurance, travel, and taxes must be held in due proportion to the 
product marketed. The advertising must neither be too niggardly 
nor overexpensive ; nor must it be badly selected in method or 
kind. The outlays in experiments with new processes, new cus- 
tomers, new formulae, and new lightning-rod agents must conform 
to the nature and size of the undertaking, and must be made with 
due regard to the total financial resources and to the measure of 



LAWSlOF RETURN 433 

loss which the general condition of the business can carry without 
menace of severe financial pressure. And the use of credit must be 
safely within the security which may be offered and the amount and 
kind of disposable collaterals. The business must not be per- 
mitted to tie up an overlarge share of its funds in credit accommoda- 
tions to customers. Nor must the bank balances be so scant as to 
forbid of taking prompt advantage of attractive cash bargains, nor 
yet so large as to permit of waste upon idle funds. And not merely 
this : but the choice of a business and the nature of the business, 
the nature of its departments and the size of each, the qualities 
of the employed men, the grades and kinds of machinery and of 
work cattle and of breeding stock, the safe volume of credit and of 
debt, — must all be affected by the breadth of grasp, the fitness 
and resourcefulness and the peculiar experience of the particular 
entrepreneur. On the one hand he must have care to restrict his 
operations to conform to his managerial capacity and to his super- 
visory abilities ; on the other hand he must not allow any part of 
his supervisory abilities to run to waste. Everything in proportion ; 
" The great bad," as Jane Carlyle remarked, " is in mixing things," 
— badly. 

The competitive-dynamic formulation. — Here, again, the 
step from the static to the dynamic is so ready of making as 
to be almost inevitable. Whatever is true for the analysis 
of the static situation before the dynamic influences have 
come to apply will in doctrine and method hold for the analysis 
of the situation in its new setting. For a full treatment of 
the dynamic aspects of our problem we should therefore have 
to inquire (1) as to the influences resulting in changes in 
the relative supplies of particular factors, or in the relative 
demands for products, or in the technological relations be- 
tween the various productive factors ; (2) as to the bearing 
of these changes (a) upon the total <bf the entrepreneur's 
product in terms of price relative to~Tiis costs in terms of 
price, (6) upon the relative changes in his outlays for the 
various cost factors, — that is to say, upon the terms of the 
distribution of his price product. For some of the costs to 
the entrepreneur are distributive shares to the recipients. 

Nothing in the way of explanation can be offered here for the 
various modifications in human beings affecting either the demand 
for goods or the supply of goods. Men in the average or in the 
2p 



434 THE ECONOMICS OF ENTERPRISE 

aggregate change in numbers, in needs and desires, and in tiie rela- 
tive strength of their different needs and desires. As productive 
agents, they change in health, strength, endurance, industry, moral 
qualities, and in social and economic institutions — in their devel- 
opment of credit institutions, of transportation methods, and of the 
technique of production generally. Changes in the human term of 
the economic problem are important also in regard to the disposi- 
tion to save for the future and in regard to the direction in which 
this provision is sought. Saving partly conditions social capital- 
ization. 

Nor for the environmental aspects or the equipment aspects of 
production can more be done here than to suggest the lines of change 
that are open — the multiplication of tools, machines, and appliances, 
the subjugation of new fields, the opening up of new continents, 
all the minor modifications of the environment due to men, and, 
finally, the great total of modifications, climatic or other, which are 
beyond the reach of men to cause or to prevent. 

Nothing, indeed, is both practicable and worth doing here further 
than briefly to note the bearing of relative increases in the supplies 
of productive factors upon the values of the products especially due 
to them, and upon the relative distributive shares imputed to them 
out of the jointly produced values. 

Service wider than price discussion. — It was surely never 
a great or an important discovery with regard to prices that, 
if they change at all, they must either go up or go down. 
Equally safe, and of equal significance, was the corresponding 
deliverance with regard to costs : if they do not remain 
constant, they will rise or they will fall. There is, indeed, 
some question whether a scientific law can properly be any- 
thing other than a grouping of phenomena with relation to 
one specific causal influence, — some question, that is to 
say, whether a formulation asserting merely the outcome 
and resultant of the composition of several ffifferent cooperat- 
ing influences is, in any proper sense of the^'word, a law at all. 
But, unless as coming under this objection, there can surely 
be no harm — and no service — in indicating by the Law of 
Constant Return the sheer fact that prices will turn out not to 
change, or in dignifying by the name Diminishing Return a 
trend toward rise in price, or in understanding by Increas- 
ing Return a probable or certain fall of price. 



LAWS OF RETURN 435 

But the competitive-dynamic law of proportions may 
reasonably be expected to bear more desirable fruit than 
this. Taking it as granted that changes are to occur in the 
relative supplies of productive agents and instruments, an 
inquiry, or a series of inquiries, may certainly be made as 
to the resultant trend of prices. And there is no doubt 
also that, as matter of detail and of process in a competitive- 
entrepreneur economy, this trend of things would perforce 
express itself as a change in relative costs. But the entre- 
preneur costs are themselves results of the changing aggre- 
gate situation, and only as intermediate terms in a longer 
causal sequence to be regarded as causes of any sort. The 
ultimate determinant of the high price of any product is 
to be found in the scarcity of the productive factors upon 
which the forthcoming of the product is conditioned. 

Bearings on distribution. — No detailed discussion or analysis 
of the distributive process is practicable here. Enough has perhaps 
been said to indicate that all such laws of return as report the ab- 
solute or relative share of any price product imputed to any item 
or class of productive factors are rather laws summarizing the dis- 
tributive outcome than indicating or reporting the play of causal 
forces and the direction of the causal sequence. They are not so 
much laws illuminating other problems as deriving illumination 
from other solutions. At best they merely furnish the cost under- 
pinning for the superficial entrepreneur-cost explanation of market 
price. But, even from the entrepreneur point of view, the prices 
of the costs look as much like results of price as like causes of price. 
One caution, however, must be here repeated : It has long been 
/the vicious habit of economists to proceed directly from changes in 
'the supply of productive factors to the changing values of these 
factors, — to assume, that is, that the analysis valid for the price 
determination of consumable goods may be safely apphed to pro- 
duction goods. But again be it said that the causal sequence runs 
not directly from, the supply of instruments to the price of the in- 
struments, but first from the supply of instruments to the supply 
of products, then to the price of products, and, only as the last 
step, to the price of instruments. The law of the falling price of 
a consumable good with an increasing supply of that good holds in 
its usual formulation only because the demand schedule with any 
one line of consumption goods may be taken as a fixed fact. New 
supphes can be marketed only on terms of such prices as shall tap 



436 THE ECONOMICS OF ENTERPRISE 

lower levels of price-paying disposition. If, however, the increase 
is one of a productive agent, there results a new and larger volume 
of price product and a rearrangement of the concUtions of demand. 
The new level of remuneration is to be worked out only as the out- 
come of a new problem of distribution. There is assumed a new 
volume of price product to be imputed to a new and a rearranged 
and readjusted set of productive agents. So, then, with population 
increasing relatively to the other factors, there may be expected 
a fall in the level of wages, but this only by virtue of two influences : 

(1) a less than proportional increase in the product to be distributed ; 

(2) less favorable terms of distribution for labor relatively to the 
other agents concerned in the technological process. (See Chap. 
XV.) 

Dynamic applications. — It is evident, then, that the corol- 
laries of this Law of Proportions, taken in the dynamic and 
competitive sense, are many and important. The appli- 
cations are far wider, far more difficult, and far more signifi- 
cant than a mere analysis of the bearing of all the different 
possible changes in the supplies of productive factors (popu- 
lation changes among all the rest), upon prices in general, 
upon prices of agricultural products in the aggregate, and 
upon prices of specific agricultural products. For there 
are also the various distributive problems. Taking for 
granted an aggregate social product, greater or smaller, 
and taken, as already solved, the problem of the prices of 
these products, there remain to be analyzed the terms and 
proportions under which these various price products are to 
be distributed among the cooperating factors, each share 
being regarded not merely in the aspect of an absolute com- 
pensation, but also as a compensation relative to the other 
compensations. 

For example, what must be the effect, both absolutely and rel- 
atively, of changes in population upon land rents, machinery rents, 
wages, profits, and discount rates? What effect from changes in 
per capita technological efficiency? From changes in the supplies 
of skilled labor of different sorts? Of unskilled labor? From ex- 
panding credit and increasing loan fund? From changes in the 
supplies of machines and appliances, both in volume and in kind? 
From changes by the opening up of new lands? From improving 
transportation between the old lands? 



LAWS OF RETURN 437 

And it may be noted, also, in relation to the changes in 
the prices of consumption goods, that this Law of Propor- 
tions is fundamental to the study of the incidence of commod- 
ity taxes upon consumers, — the process of forward shifting ; 
while, as explaining the modifications in rent, profits, wages, 
and time discounts, as distributive shares out of a jointly 
produced product, this law is fundamental to an understand- 
ing of the process of backward shifting. 

To resume, then : This Law of the Proportions of Fac- 
tors, in no matter which one of its varying formulations and 
applications, derives its validity from the limitations upon 
the substitution of factors one for another. But the combi- 
nations and factors with which it has to do are legion. It 
breaks up into sublaws : (1) of social application, both 
static and dynamic ; (2) of competitive application, both 
static and dynamic. These laws of the competitive sort have 
a wide range of subordinate formulations and applications, 
— among others, bearings upon the values of consumable 
goods of every sort, upon the distributive shares of cooper- 
ating productive factors indefinite both in variety and in 
technological combination, upon discount rates, upon the 
distribution of tax burdens, and upon the capitalized values 
of such productive factors as are subject to the capitalizing 
process. 

The law of advantage and size. — For some purposes the use of 
the terms Diminishing and Increasing Returns is extremely unfor- 
tunate, not merely because each of the terms has come to be used 
in a perplexing variety of meanings, but, more seriously still, because 
of the misleading antithesis implied. 

For, evidently, if disadvantage goes with the unskillful combina- 
tion of cost factors, it must also be true that advantage goes with 
the skillful combination. If in one case loss occurs through adding 
a factor already m sufficient supply, it must be equally the case that 
advantage accrues through increasing the supply of a factor not yet 
adequately present. If a falling rate of compensation goes with the 
making of certain increases, it is thereby implied that more of some- 
thing else is needed to arrive at the best proportions between factors. 
And if the bad management manifested in the bad proportioning 
of factors is indicated under the Law of Diminishing Returns, 



438 THE ECONOMICS OF ENTERPRISE 

should not the Law of Increasing Returns connote the good results 
that go with the wise adjustment of factors? But this would be 
to give two names to what in point of causation is only one law, — 
the significance of the bad proportion of factors. 

And more than tliis : if it be true that, while disadvantage is 
resulting to a given business through a bad proportioning of factors, 
an equal or a greater advantage may at the same time be reaped 
from the mere fact of the mere size of the business unit, — if, that 
is to say, the proportions of the factors may have one causal bearing, 
and an increase or a decrease in the size of the unit may have an- 
other bearing, altogether irrespective of the question of proportions, 
there is evidently another difficulty presented : What shall we call 
this law — or these laws — of good or ill results attendant upon the 
mere matter of size? Note, also, that this increase of size may be 
attained by adding more land to land or more labor to labor or 
more instruments to the instruments already in hand. The pro- 
portions between factors may have little or no significance. If 
there are also two laws here, one of increasing and the other of 
diminishing returns, each appropriate accordingly as the experience 
is fortunate or unfortunate, we must now face the difficulty not 
merely of having two laws formulating the effects of one cause, but 
also the difficulty of using the same pair of terms for two entirely 
distinguishable sets of causes. 

Assuming, however, so far as we may, that in current usage some 
approximately definite meaning has attached to the terms " Di- 
minishing " and " Increasing " returns, it would seem desirable to 
rename the Law of Diminisliing Returns as the Law of the Propor- 
tions of Factors, and the Law of Increasing Returns, as the Law of 
Advantage and Size. 

Size versus proportions. — But, even so, we are not yet 
quit of all our perplexities. For, after all is said, many of 
the advantages seemingly dependent on the sheer increase 
in the size of the business unit are in reality the mere expres- 
sion of the fact that a bad proportion has hitherto existed 
between the entrepreneur factor and the other factors in the 
productive complex. May not this, indeed, be the ultimate 
explanation for all the advantages going with the giant 
business and for the trend toward progressive consolidation ? 
It is at all events clear that, no matter how many other classes 
of factors there may turn out to be, — whether three or three 
thousand, — entrepreneur ability forms one class, at the 



LAWS OF RETURN 439 

least. And this factor, or these factors, of entrepreneur 
ability may be in defect or in excess relatively to the other 
factors in the productive combination. The entrepreneur 
may have in charge all that he can advantageously attend 
to ; or, on the other hand, a part of his supervisory and man- 
agerial power may be running to waste. Is, then, in itself, 
size a distinct and separate cause of advantage? This 
needs looking into. 

It is at any rate to be said, in support of a distinct and 
separate Law of Advantage and Size, that there are some 
lines of industry and some conditions in which there early 
accrues a diminishing advantage with increasing size ; e.g., 
in farming ordinarily and in manufacturing under conditions 
of the limited market imposed by undeveloped methods of 
transportation. This situation, commonly especially char- 
acteristic of farming, is in itself an illustration of the very 
law which superficially it might appear to deny. Farming 
exemplifies the Law of Advantage and Size, only that the 
advantage goes not with the larger business, but rather with 
the smaller. 

Not merely this, but the Law of the Proportion of Factors 
not only has, as we have seen, a technological basis, but it 
implies, in any given set of cost levels, a best technological 
combination in relation to each particular entrepreneur. It 
is, after all, a Law of Proportions between different sorts of 
costs, some, but not all, of which are based upon ultimate 
technological relations.^ 

On the other hand, the Law of Advantage and Size has 
seemingly little relation to the technological situation, and 
still less reference to the technological proportions in the 
business unit. For, as has already been noted, the advan- 

i Some of these costs, be it repeated, are truly eommonly techno- 
logical, but it is equally clear that some are eommonly not so. 
Not only is it true that the technological factors to be correlated 
are legion, but also that there are other costs which are entirely 
lacking in the technological basis, but which are none the less 
submitted to the necessity of proportion ; e.g., insurance, adver- 
tising, and taxes, and, in general, those lines of expense connected 
with administrative and sales departments, — clerks, bookkeepers, 
traveling men, and the like. 



440 THE ECONOMICS OF ENTERPRISE 

tages of the giant industry are readily attained through 
the addition of more labor to labor or more machines to 
machines or more land to the land already employed. The 
question mostly refers to the size of the investment, the 
aggregate operating fund in terms of price, irrespective of 
its technological applications or of the apportionment of 
this aggregate fund among the different sorts of cost bases. 
Size refers here not to the kind or quantity of the instru- 
ments and appliances of production, not to capital in the 
technological sense, but rather to capital in the competitive 
entrepreneur sense, as the total price of the resources em- 
ployed in the business, irrespective of its technological or 
nontechnological application or apportionment, whether into 
land or labor or machinery or what not. 

This is not at all to deny that many undertakings suffer 
from a lack of business capital relatively to entrepreneur 
ability, — suffer, that is, from the fact that there is an un- 
saturated margin of supervisory power which is running 
to waste. Cases of this sort, falling accurately within the 
Law of Proportion of Factors, are easily confused with other 
cases properly falling under the Law of Advantage and Size. 
But the distinction is theoretically none the less clear. Sev- 
eral competing producers may often advantageously unite, 
and may advantageously retain all the old managers as 
special department managers or as together constituting 
a new managerial board. The aggregate ^of managerial 
effectiveness may be appreciably greater through this fusion, 
and may stand as of itself an illustration of the general Law 
of Advantage and Size. And therewith may go also other 
important economies and efficiencies, not only of supervision 
and organization in the mechanical processes of production, 
but as well in the buying of raw materials and in the sale 
and the delivery of the product. 

The Law of Advantage and Size is, therefore, a real and 
valid law entirely distinguishable from the Law of Propor- 
tion of Factors and in no sense the antithesis of it. Any 
industry may easily illustrate both laws at one and the same 
time — may, indeed, illustrate the beneficial working of 
the one and the injurious working of the other. The under- 



LAWS OF RETURN 441 

taking may, for example, be excellently organized in point 
of proportions and may yet be either too large or too small ; 
or it may be of the desirable size and yet relatively over- 
supplied with capital goods or with plant or with unspecial- 
ized working fund or with land ; or it may be overmanned ; 
or it may be inadequately supervised. 

Comparative advantage in competing industries. — It is, however, 
important to note that, for competitive purposes, the law of changing 
proportional price productivity with changes in the size of the busi- 
ness unit is not safely to be taken to apply in any one hne of industry 
taken as a group, but only to the competing industries inside the 
group. For it may readily be true that the organization of any 
industry into the giant form may so reduce the costs therein that, 
even vrith an expanding product by weight and tale, the aggregate 
price product is a smaller one. And this might hold of manufactur- 
ers as a whole as over against agriculture as a whole. 

Nor can the law rightly imply that greater price productivity 
goes per unit of expense with increasing size. This is not neces- 
sarily true. It is safe to assert only that to the greater industrial 
unit goes the relatively greater product or profit. For when the 
elasticity of consumption is not great, and when competition among 
rival businesses is close, lower prices may obtain to the extent of 
bringing a lower price productiveness for each industrial unit and a 
generally lower average of price product and of profit. And yet it 
ma.y remain true that the larger units suffer least. 

■'Nor is the Law of Advantage and Size concerned with the fact that 
in industries of heavy investment and of heavy fixed charges the 
extra cost of successive items of product is less in proportion to the 
increase of weight-and-tale product, — a formulation which, as of 
necessity, says nothing as to the aggregate increase in price going 
vsdth the increase in product, but leaves it possible to be assumed that 
the entrepreneur will limit his product at the point where the extra 
expense of production, together vsdth the falling prices upon the 
original product, balances the extra price represented in the added 
items. In truth, cases of this sort present a peculiar illustration 
of the Law of Proportion of Factors ; for its best results — demand 
for products and prices of products standing at a given level — 
the industry is calling for a changed proportion of productive 
factors, or it is being found true that the proportion of factors, best 
ordinarily and in the long run for price results, is not the best 
temporarily. If, for long-run purposes, it is regarded as undesirable 



442 THE ECONOMICS OF ENTERPRISE 

to make an all-round increase in the size of the unit, the best adjust- 
ment for temporary purposes must be reached through a propor- 
tionment of factors which would be a maladjustment for long-time 
purposes. This comes about through the fact that, as a long-time 
computation, the fixed charges must be counted as costs, and that 
in this computation the costs must stand as an aggregate of price 
and as set over against an aggregate product in price. Cost for 
long-time purposes is rather an average than a marginal cost. But 
in the short-time reckoning the marginal computation is valid, if 
only all the elements are properly included. To this sort of mar- 
ginal cost, fixed charges are for the most part irrelevant. (See 
Chap. XXV.) 

It appears, then, that to find out Avhat there really is in 
this Law of Advantage and Size it is necessary rigidly to 
exclude all influences of improving technique (developing 
human beings) and all influences ranking under increased 
demands for products, and to confine ourselves to the sheer 
competitive advantages of combination or concentration 

(1) for increased weigh t-and-tale product per unit of expense, 

(2) for increased price product per unit of expense. 
Applies in what industries. — It is obvious that no a-priori 

reason exists Avhy this Law of Increasing Return might not 
characterize all industries. If it does not or if it does so 
unequally, the reason must be sought in the peculiar nature 
of the industry in question. The law may fail to hold with 
certain industries, because by the nature of the instruments 
which they employ or of; the processes required (e.g., as with 
land), the business unit cannot greatly increase, the giant 
organization being impracticable ; or the market may be so 
limited as to render giant organization impossible. And, as 
has already been seen, the law is clearly not one referring by 
necessity to the interdependence of factors or to the constitu- 
tion of the business unit in respect to the factors included. 

Range of applications. — It remains to point out that this 
Law of Advantage and Size, like the Law of Proportion of 
Factors, has also its different aspects of service accordingly 
as it is taken in its static or in its dynamic aspects. It may be 
invoked to explain some of the phenomena of rising or of 
falling prices. Or its service may lie in the analysis of the 



LAWS OF RETURN 443 

tendency of profits toward rise, or fall, or differentiation; 
or its significance may be found in estimating the forces mak- 
ing for consolidation or for monopoly in business ; or, finally, 
some bearing may conceivably be deduced upon land rents, 
upon the wage level, and upon time-discount rates. That 
is to say, this law also is fundamental in its significance for 
the explanation of the prices upon consumable goods and 
for arriving at the forces determining the outcome of the 
distributive process. It follows, also, that this law must 
be appealed to in the examination of the forward shifting 
of tax burdens upon consumers, and as well also in the exam- 
ination of backward shifting. This backward shifting 
must obviously take place through the modification of the 
distributive shares apportioned out of a product jointly 
produced by the various productive factors. A tax limiting 
the market for any product and appropriating a part of 
the reduced total of price will not merely reduce the aggre- 
gate fund of price to be shared among the various cooperat- 
ing factors, but commonly/also will appreciably modify these 
shares relatively to one another. 

The Law of Diminishing Returns has been considered in 
earlier chapters in its generally recognized relation to the 
cultivation of land, to the rent of land, and to the prices of 
agricultural products. This chapter has raised no question 
as to the validity of this law, but only as to the ambiguous 
renderings of it, and to the failure to give it proper extension 
over the general field, not only of production, but of all 
business enterprise. It has been shown that even with 
reference to the employment of land, the law has sometimes 
been given a social emphasis for purposes of history of proph- 
ecy, sometimes a purely technological emphasis for pur- 
poses of competitive production ; but that always the dis- 
cussion has limited itself to the porportions in which labor, 
or machinery, or wage outlays, as particular expense or as 
aggregate expense, are applied to land — the land being, 
in turn, sometimes regarded as area, at other times as a farm 
unit, and at still other times as a price investment ; that 
these ambiguities and confusions have resulted from several 
misconceptions : (1) the failure to perceive that the principle 
of disadvantage from a poor combination of factors, and of 



444 THE ECONOMICS OF ENTERPRISE 

advantage from a wise combination, is applicable not only 
to the relations of land to the other factors in production, but 
also to the relation of all the other factors to land, and to the 
relations of all the other factors to one another; (2) the 
failure to recognize that the law has social statements and 
applications, with reference both (a) to any given situation 
and (b) to the significance of modifications of any given 
situation past or future ; (3) the failure to see that the 
law has also its competitive statement and applications, in 
its bearing on market prices, and on the market rents both 
of land /and of other instruments of production, and on the 
profits of any entrepreneur ; (4) the failure to appreciate 
that the competitive rendering of the law has equally its 
static and its dynamic aspects ; (5) the failure to confine 
the social renderings of the law to questions of the aggregate 
or the per capita product' of goods in society, as distinguished 
from questions of prices, rents, and distributive shares ; 
(6) the failure to confine the competitive renderings of the 
law to questions of price costs as against returns in terms 
of price, and the bearing of land scarcity strictly to price 
rents and price wages and price profits ; (7) and finally 
the error to which all the other errors are contributing or 
subordinate — the notion that land stands to competitive 
business in some distinct and peculiar relation, conforms 
to different laws, controls peculiar incomes, and is itself 
something other than one item of capital among many other 
capital items. 

It has also been shown that the recognition of this broad 
and general Law of Proportions not nerely compels the 
abandonment of the distinction between land and capital, 
but compels also the abandonment of all attempt to subject 
the factors of production to any principle of classification ; 
that while technological factors in production must be recog- 
nized, to the relations between which the law of proportions 
applies, there are also to be recognized many other non- 
technological factors to which the law equally applies ; that 
as the costs are not four but legion, and the distributive 
shares not four, but legion, so the factors of production are 
legion ; that the interrelations among the factors are infinitely 
complex — some relations of substitution and some comple- 
mentary relations, but all relations which are in process of 
constant change, and which both in variety and in mutability 
defy fixed classification. 



LAWS OF RETURN 445 

The Law of Advantage and Size formulates the relations 
between the sizes of business units and the derivative gains. 
Certain economies and certain opportunities are controlled 
by the size of the industrial or business unit ; the question 
is not, for this purpose, the ratio between the factors, but 
the size of the undertaking as a whole, the proportions 
possibly remaining unchanged. When, however, the chief 
economy of size is in the possibility of achieving a better 
proportion of factors^ the line between the two laws is not 
so easily drawn. Size being, however, fundamental to the 
best proportions, the advantage must be recognized as attach- 
ing ultimately to the size. In any case, this Law of Advan- 
tage and Size has no necessary comiection with technological 
considerations either of process or of product. It points 
merely to the aggregate volume of capital investment, in 
no matter what directions, — a price total, — and concerns 
merely the greater or smaller competitive power attaching 
to the change in size. This law will, therefore, greatly 
illuminate our later analysis of cost of production under the 
giant organization, and likewise the analysis of the recent 
trend of industry and of business toward both concentration 
and monopoly. 

The following chapter will especially analyze the relations 
of the aggregate supplies of the different productive factors 
to the remunerations which these factors respectively com- 
mand, and therefore to the distribution of incomes in society. 
Some special, though slight, attention will be given to the 
effects of increasing population on rents and on wages All 
the problems to be considered are, then, to be recognized 
as rather of the dynamic than the static group. But as 
these changes, being future, are conjectural, and indefinitely 
great in number, and indefinitely various^in degree, the 
possible permutations in the hypotheses make exhaustive 
discussion impossible, and allow only of the selection of 
certain specific problems for illustrative discussion. The 
chapter will, therefore, accomplish not much more than to 
prove that not much can be accomplished. 



CHAPTER XXIV 

DISTRIBUTION AND THE LAW OF PROPORTIONS 

Distributive versus cost analysis. — Already in the ex- 
amination of cost of production many distributive problems 
and processes have unavoidably come under discussion. 
Not all, clearly, but some entrepreneur's costs are also dis- 
tributive shares. But the cost analysis regards these sums 
not from the point of view of him who receives the pay, but 
of him who pays — from the point of view of the one to 
whom the costs are resistances, rather than from the point 
of view of those to whom they are remunerations. To the 
entrepreneur the selling price must stand as indemnity for 
the sums which, as costs, he has dispensed. So far, therefore, 
as the analysis of entrepreneur costs has disclosed the processes 
by which the various entrepreneur outlays are determined — 
outlays, among others, for labor and land and machinery — 
so far has a distributive analysis been completed. It need 
not matter, for the purpose in hand, how many classes of 
productive factors are to be recognized, or into how many 
different varieties each of these classes is to be subdivided. 

Exaggeration of technology. — But that danger signals are neces- 
sary here is proved by the course which the traditional distributive 
analysis has actually taken : (1) Production, and therefore dis- 
tribution, have commonly been interpreted as processes in wiiich 
only technological factors are involved. (2) The influences which 
the presence of other factors may exert upon the distributive share 
of any given factor — the mutual relations and interactions of the 
factors — are prone to be interpreted as presenting that limited 
number of combinations and applications possible with only three 
or four separate productive factors, whereas, in fact, the combina- 
tions and interactions are legion. (3) The distribution which 
takes place under the entrepreneur process of cost outlay in pro- 

446 



LAW OF PROPORTIONS 447 

duction has been presented as the sole distributive process; not 
only are all entrepreneur's costs assumed to be Umited to wages, 
profits, rent, and interest, but it is also assumed that the entrepreneur 
cost categories are the only distributive categories. Hence the 
productivity theory of distribution: that all incomes accrue by 
productive contribution and — accurately or approximately — 
accrue according to productive contribution. (See Chap. X.) 

"What factors are technological? — That the outlays of production 
are concerned with innumerable different factors, and that many of 
the costs are applied in directions lacking all technological character, 
we have already seen. It must, indeed be admitted that the line 
between the technological and the nontechnological is difficult to 
trace. Outlays for transportation — the method by which you get 
goods to your customer — may be taken to be technological. But 
advertising expenses — the ordinary way by which you get your 
customer to come to you — are equally clearly not technological. 
If, however, the advertising be by steam whistle or by electric 
searchlight, the case does not look so clear ; the process is techno- 
logical, only it has not to do with the making of the product, but 
solely with the marketing. It is financial and pecuniary rather than 
mechanical and industrial. Take, for example, the business of mak- 
ing automobiles : The producing of the cars — the task of the me- 
chanical department — is technological. The inspecting depart- 
ment may also be so regarded, though not quite so confidently. 
The sales department is clearly not so. To speak here of factors of 
production would be inappropriate. True, good advertising, in 
place of good workmanship or of good inspection, may serve to 
stimulate a demand for goods, but has nothing to do with bringing 
about the existence of the goods as objective material facts. The 
advertising method is perhaps more effective for gain than is me- 
chanical efficiency, but it is another kind of method. The more the 
advertising that goes with a cigar, the less good tobacco you are 
likely to get for your money. To declare that all the processes 
involving cost and promising gain are technological, and that, since 
there is nothing else to invest in, all gainful investment must per- 
force be distributed among the three technological factors, land, 
labor, and capital, is either to violate the distinctions upon which the 
threefold classification is based, or is deliberately to abandon any 
attempt at preserving the distinctions. In the dark all cats are 
gray. The very impossibility of making precise destinction between 
what is technological and what is not, must somewhat discredit the 
distinction as a basis of classification. 



448 THE ECONOMICS OF ENTERPRISE 

Interdependence and substitution. — It was suggested 
in the last chapter that the Law of the Proportion of Factors 
has some important distributive aspects. Precisely because, 
between the different factors of production, there are ulti- 
mate interdependences of the technological sort, together 
with other interdependences which are in no degree techno- 
logical, it comes about that there are different degrees of 
desirability in the different possible combinations of factors. 
For each different entrepreneur there is his one best com- 
bination in view of what the different factors are costing. 
If lumber is cheap and feed is dear, the skillful farmer will save 
feed by building better sheds and barns. At the given level 
of the various costs, too much or too little of any factor gives 
bad results in price. 

But that there can be too much or too little of any one 
factor proves (1) that there is an actual interdependence, 
and, (2) that substitutions of one factor for another are in 
some degree possible, (3) but that these substitutions have 
their limit. The fact that, with any change in the relative 
prices of the factors, the best combination is a new combina- 
tion is merely a further proof. No combination could be 
better than another in price results, were it not for the ulti- 
mate differences of factors in the productive process or in the 
business process. Those differences which exist irrespective 
of the prices of the factors are precisely the reasons for the 
differences that attend the different relative prices, and are 
the reasons for the nrw combinations which attend new 
levels of prices. 

Distribution favors the relatively scarce. — A corollary 
of this — or, perhaps better, a restatement of it — runs to 
the effect that, for any relatively scarce factor in his process, 
the entrepreneur can afford to pay, if he must, a relatively 
large hire or price. Restated, this amounts to saying that 
the distributive outcome is the more favorable to the factor 
that is relatively scarce. When spinners are plenty, weavers 
will be dear. When lumber is cheap, there will be the greater 
demand for carpenters. High-priced building sites limit 
the number of dwellings. The key to the situation is the best 
paid thing in the situation. As highly trained men become 



LAW OF PROPORTIONS 449 

less rare relatively to the men who are to be supervised and 
directed, salaries will fall relatively to wages. As employing 
ability becomes better and more plenty, the wage share in 
industry will be increased — so far, at least, as the situation 
remains competitive. The multiplication of skilled labor 
will in general help unskilled labor — unless, indeed, the land- 
lord shall intervene at the aggregate expense of both. All 
this merely repeats that the relative scarcity of any factor 
is the explanation of the high significance of it to the entre- 
preneur, of the high remuneration that he can afford to ad- 
vance for it, of the high cost that he will have to submit to if 
he gets it, and of the high distributive share that goes with it. 
Von Wieser puts the case effectively as follows : 

A demand for means of production arises only when, on the one 
hand, we are obliged to employ them or else go without what they 
produce ; and when, on the other hand, we can employ them, in- 
asmuch as we have at our disposal the necessary complementary 
goods. ... It follows . . . that the effective demand for means 
of production must vary, not only when there is a variation in 
personal wants, but also when there is a variation in the quantity 
of complementary goods. ^ 

Each factor affects the other's share. — It is, then, not 
open to question that the supply and the derivative hire or 
cost of any factor in production — e.g., land, machinery, 
transportation, insurance, police protection — must have 
of necessity a direct and important bearing upon the re- 
muneration of other factors, e.g., upon the wages of labor, the 
profits of entrepreneurship, the rents of houses, the prices 
of fuel or of hides. Dense population hurts wages, not only 
by diminishing the average per capita output of product, but 
in carrying to the landlords a larger share of this more 
scanty product. The demand for plows is doubtless deriv- 
ative from the demand for foods, but not directly. In any 
event, it is equally to be said that the supply of land furnishes 
the demand for plows ; lumber affords a demand for nails, 
horses for wagons, wagons for horses, plows for land, men for 
plows, plows for men, horses for stables, stables and horses 

1 Wieser, Natural Value, p. 102. 
2g 



450 THE ECONOMICS OF ENTERPRISE 

for carpenters and for stable boys, horses and wagons for 
harnesses and for drivers, etc. 

Population and wages. — But what, in truth, other things 
remaining unchanged, is the bearing of increasing population 
upon the wage level? 

To make the question accurately intelligible it must be 
assumed that the different grades and kinds of labor increase 
proportionally. And even then, will it do to assert that 
wages must fall ? How comes it to be true, if it is true, that 
the volume of population influences the wage level? Is it, 
for example, possible to say, with Professor Carver, that 
" the wages of labor are determined by an equilibrium of 
two forces, — the productivity of labor, on the one hand, 
creating the demand for it, and the standard of living, on the 
other hand, limiting the supply of it" ? 

Confusion of static with dynamic. — Not at all denying 
the bearing of these two forces as somehow influencing wages, 
each in its own way and time, it is yet to be objected that 
the ways and the times are separate ; that the offered ex- 
planation of wages is really a mixture of long-time and short- 
time influences, — on the one side a static category, a situa- 
tion, — on the other side a dynamic variant making for 
possible changes, and then a balance somehow struck between 
them. The analysis neither stays in nor abandons the field 
of entrepreneur wage costs, but confuses the costs as they 
are with the supposed causes of the costs, and with possible 
or probable variations of the costs. But, even so, the argu- 
ment is open to further serious criticism ; for in reality the 
standard of living is itself a derivative from the productivity 
of the labor. The standard of living, as fixing the popula- 
tion-supply term, and as set over against productivity as the 
demand term, will, then, hardly serve as a full explanation 
of wages. In turn, also, the productivity of the labor is 
derivative from the supply of labor — so far, at least, as 
population affects the case at all. 

Equating now against then. — ■ But however this may be, 
it is in any case clear that as a question of existing wages the 
productivity of to-day cannot, for any purpose of present costs 



LAW OF PROPORTIONS 451 

or present wages, or under any entrepreneur computation, 
be equated against the labor supply of some years hence. 
The supply then bears solely on productivity, and solely on 
productivity then — two productivities, twenty years apart. 
The wages of all the yesterdays and of to-day may possibly 
have something to do with the supply of labor twenty years 
hence ; and the supply of labor of that time will doubtless 
equate against the demand of that time. The supply of 
to-day has precisely that same relation to the demand of to- 
day. To-day there is no equating of the demand or supply 
or product of to-day with the demand or supply or product 
of any other time. Any alleged effect from wages, through 
standards of living, on the supply of labor, — whether, on 
the one hand, the position urged be that high wages and high 
standards of living stimulate the birth rate and the per- 
centage of maturities, or whether, on the other hand, the 
effect be asserted to be precisely the reverse — may be equally 
well admitted or denied with equal irrelevancy to all problems 
of the current adjustment of wages ; productivity is as it is. 
Investigation of these lines of influence is, then, merely a more 
or less successful attempt at a historical explanation of the 
present labor supply, and, so far as the labor supply has to do 
with the individual wage, is an attempt to explain some of 
the causes of the present conditions controlling or influencing 
the ruling level of wages. But the ruling level of wages will 
be the same whether or not the historical explanations offered 
be well supported. So the wages to rule twenty years hence 
may to-day be possible of vague conjecture ; and in the mak- 
ing up of the prophecy some bearing may be ascribed to the 
expected population totals of that time; and these totals 
may, with more or less justification, be attributed to the 
standards of living prevailing to-day. But all this is proph- 
ecy, and has nothing to say for the wages of to-day. 

Population : Standard of living : Wages. — Nor — and 
this is the important fact for the present discussion — even 
after the twenty years' term has expired, will such population 
changes as may have taken place have overmuch to say. 
It is a vastly dangerous doctrine to assert, even on the supply 
side, the dependence of wages either on the standard of living 



452 THE ECONOMICS OF ENTERPRISE 

or on the supply of labor. For consumption goods, truly, 
the reasoning rightly runs that an increased supply diminishes 
price ; but for production goods the doctrine, so far as it 
is applicable at all, applies differently and to different 
results. Whenever the very increase in supply itself implies 
and necessitates a change in the volume of demand, the 
demand-and-supply formula, entirely accurate for consump- 
tion goods, becomes, for production goods, entirely misleading 
unless used in a very different sense. 

If the labor supply increases, how can any one know that 
the wages must fall ? Is it certain that either the per capita 
productivity by weight and tale or the per capita price pro- 
ductivity must suffer? Not unless the other classes and 
qualities of agents have failed to make a corresponding in- 
crease. And suppose that they have not ; with an increased 
labor supply the social dividend is increased ; is it to be assumed 
that only the old total of wages can, under the new aggregate 
productivity of labor, be distributed among laborers? If 
labor has doubled and all kinds of it have doubled, but if, 
at the same time, the other productive factors have failed 
to increase or to increase with corresponding rapidity, it 
may be taken as true that not quite twice as great an aggre- 
gate of social product will be possible ; and out of this some- 
what smaller per capita product a larger relative share will 
go to the agents relatively scarce, and a somewhat smaller 
relative share to the laborers. And this is all there can 
possibly be of truth in the proposition that " the wages of 
labor are determined by an equilibrium of forces — the pro- 
ductivity of labor, on the one hand, creating the demand for 
it, and the standard of living of laborers, on the other hand, 
limiting the supply of it." (See Chap. XIV.) 

To put it another way : Since with the change in the supply of 
labor the value product to pay with is all the while changing, that 
is, the productivity demand is changing, the effect upon the wage 
level must sum up as the solution of two inquiries: (1) in what 
measure, relatively to the increase of labor, is there a resulting in- 
crease in the total product to be distributed ? (2) in what measure 
does labor, in the distributive process, fail of receiving the whole of 
the increase of product resulting from the labor increase? It is 



LAW OF PROPORTIONS 453 

evident that an appeal to the ordinary demand-and-supply formula 
does not promise great results for the purposes of this problem. 

Classification of dynamic modifications. — Limitations of 
time and space forbid the attempt to catalogue, even in a 
general way, all the possible combinations of productive 
factors, and to analyze the changing distributive relations 
which must attend these different combinations. Some of 
these problems have, indeed, been covered in our previous 
discussions of wages, rents, profits, and time discounts. 
Not much more can be done than to present a possible classi- 
fication of those directions of change which, as modifications 
in the ultimate conditions under which production and dis- 
tribution take place, must influence the respective outcomes. 

Precisely how the dynamic facts shall be classified is, 
from one point of view, perhaps not an important matter. 
Professor Clark's fivefold division into changes, (1) in 
population, (2) in capital, (3) in industrial methods, (4) in 
business organizations, (5) in human wants, is possibly as 
serviceable as any other. Making some effort, however, 
toward arriving at a classification more nearly approaching 
the ultimate, we shall, perhaps, settle upon something like 
the following : modifications (1) in humanity, (2) in environ- 
ment. Under modifications in humanity are to be catalogued 
the following lines of change : 

(a) in numbers. 

I changes in aggregate wants, 
changes in relative intensity, 
changes in kind and direction. 

I changes in industriousness or strength, 
changes in technique, 
changes in organization. 



Under modifications in environment : 
(a) In land . 
(6) non-land changes, capital goods. 



changes in the sources of food supply, 
changes in the sources of raw materials 
of industry. 



454 THE ECONOMICS OF ENTERPRISE 



(c) changes in loan 
fund and in prop- 
erty institutions 



from the point of view of each entrepre- 
neur an objective, environmental fact ; 
from the social point of view merely 
relations among men ; perhaps prop- 
erly to fall under "modifications in 
humanity." 



But here again the question presents itself as to what pur- 
pose, other than schematic, this classification may be made 
to serve; but if for nothing further, it will, at any rate, 
afford a convenient guide for purposes of exposition. 

Task hopeless in magnitude and complexity. — Doubtless 
it is possible to make some broad generalizations with regard 
to the effects of increasing population upon land values 
and upon land rents in the aggregate, irrespective of whether 
all lands must equally share in these effects. Possibly, also, 
though less securely, something might, in wide generalization, 
be said of the effects of increasing machinery upon rents or 
upon wages, all this, likewise, without attempt to distribute 
labor into different sorts and grades in its technological 
relations to machinery. 

But the difficulty with all this is that all of it has its basis 
in the technological relation of different instruments and 
agents to one another, and that these technological relations 
will not classify in even a loose and general coincidence with 
the traditional threefold classification of productive factors. 

Changes in industrial methods. — Something, however, 
must be said as to the effects of changing technique. The 
traditional threefold classification is especially disastrous 
here. Hygiene may render pill-rolling machinery useless ; 
invention may largely displace both labor and instrumental 
goods, and may shift the emphasis over upon land generally 
or upon particular kinds and qualities of land. There is, in 
truth, no limit to the possible and the probable permutations 
here ; here, indeed, it isalwaysthe unexpected that is probable. 
How complicated these problems are, and how dependent 
for their solution upon assumptions tacitly made or un- 
consciously implied, may be seen in an analysis of the re- 
lations of improvements in transportation and in crop-raising 
technique to the rental values of land. 



LAW OF PROPORTIONS 455 

But all this detail grows wearisome, simply because there 
can never come any end to it ; at the best, it is mostly a 
disciplinary gymnastic. But this much, at least, stands 
forth clearly : Every problem in the dynamics of value, in its 
distributive aspect, must seek its solution along two lines 
of inquiry : (1) How does the new development affect the 
social dividend? (2) Does the new development tend, as 
complementary good or process, to make relatively greater 
the demand for the instrument or agent under examination ? 
or, rather, is the relation one of substitutionary good or 
process — amounting, that is, to an increase in the supply of 
the goods under examination ? ^ 

1 Elasticity of Consumption : Land Rent. 

Space and air and food are the prime necessaries of life. But it 
is only food that has to be paid for in order to have it in the req- 
uisite measure. The utility of the first unit of good is infinite, or 
nearly so. But the utility curve falls sharply ; it is easy to have 
more than enough ; our want is limited. And with this sharply 
falling curve of utility, there go sharply falling price-demand 
curves, individual and aggregate. This steepness of curve is only 
another way of asserting that fabulously high prices must attend 
any great shortage in the aggregate food supply, and that a great 
fall in price must follow upon a world-wide bountiful harvest. 
With a short supply of any commodity, the price must go high 
enough to shut out all purchasers not able and willing to pay gen- 
erous prices ; with a generous supply, the price must go low enough 
to find purchasers for all of the supply. But with some commodi- 
ties a small fall in price will uncover a widely extended market ; 
these are the commodities whose consumption is said to be elastic. 
With these commodities also rising prices rapidly retire the demand. 

But with other things, and with food especially, the consuming 
disposition responds ungenerously to falling prices, while at the 
same time it is not greatly affected by rising prices. These are the 
commodities of inelastic consumption — the commodities of steep 
demand curve. 

With commodities, then, of marked inelasticity of consumption, 
prices fall more rapidly than the supply increases, and rise more 
rapidly than the supply diminishes. With food products espe- 
cially, the rise of prices is out of proportion to the decrease in supply 
and the fall out of proportion to the increase. 

The relations of improving agricultural technique and of cheap- 
ening transportation to the rents of agricultural lands are to be 
analyzed only in the light of the inelasticity in the consumption of 



456 THE ECONOMICS OF ENTERPRISE 

agricultural products. The traditional analysis has assumed a 
practically inelastic consumption and has deduced the conclusion 
that the effect of any of these improvements must be a reduction in 
the world total of agricultural rents. Nor, with the assumption 
accepted, is the conclusion to be avoided. An improvement in 
technique is equivalent to an increase in the fertiUty of land or in 
the supply of it. It is so far a mitigation of the land famine ; it 
might conceivably go so far as to cancel all fertility rents. Cost- 
less transportation also would cancel position rents. 

But so soon as the elasticity — or the inelasticity — is taken to 
be one of degree, the doubts multiply. To arrive at definite con- 
clusions the extent of the inelasticity must be known. 

Gregory King's Law — formulated a couple of centuries ago — 
was the first attempt, as it may long remain the last, to mask our 
unprecise knowledge of the facts in the appearance of scientific 
accuracy. The pronouncement was to the effect that if the crop of 
any one year were only 90 per cent of the ordinary crop, the prices 
would rise by 30 per cent — the aggregate selling price, therefore, 
by 17 per cent. The short crop outsells the normal crop. So with 
80 per cent of crop the prices would rise by 80 per cent, and the 
aggregate selling price by 44 per cent. 

With 70 per cent of crop .... 2.60 of price, and 1.82 total price 
With 60 per cent of crop .... 3.80 of price, and 2.28 total price 
With 50 per cent of crop .... 5.50 of price, and 2.75 total price 

Just how Gregory King found out all this, we may not too curi- 
ously inquire. The figures appear, indeed, to be an understate- 
ment of the truth if taken to apply to the aggregate food product 
of the world — probably as seriously an overstatement if formu- 
lated for any one country or for any one variety of product. In 
Gregory King's time, the world was not one market. 

Assuming, however, the substantial accuracy of the estimates 
as matter of the world supply and the world demand, it is a valid 
inference that rents in the aggregate must fall with every influence 
working for larger supplies of food products. If one acre can be 
made to produce what two acres were producing before, much 
land will be thrown out of cultivation, prices sharplj' fall, and the 
price differential between the better land and the poorer — and 
between the best land and the poorest — be narrowed. Obviously 
this must be true if only the fall in prices be sharp enough. And, 
clearly, on the assumption made, the back-to-the-land movement, 
in any large and general way, is an impossibility. 

From the same assumption, the same conclusions must follow for 
the opening up of new lands through extending and cheapening 
transportation. Prices will fall faster than the product increases. 
The rents must fall still more rapidly. 



LAW OF PROPORTIONS 457 

But even so, the analysis is valid only for the short-time tend- 
ency and for the case of a sharp divergence between the supplies 
of any particular year and the established standards of consump- 
tion. The same conclusions will not hold for periods long enough 
for changes to occur in the habits of consumption. 

It is probably true that habits of diet can modify only very 
slightly the total of nutriment that the individual can digest and 
assimilate. With centuries of adaptation and of selection (selec- 
tive adaptation), physical efficiency may come to be consistent 
with a somewhat more meager diet. But it is not easily credible 
that an increasingly generous diet can be assimilated in a degree 
to be of great importance to the discussion. 

But the long-time elasticity of consumption is mostly of another 
sort, the modification taking place not in the amount of nutriment 
consumed, but in the relative amounts of the different varieties 
consumed, or in the addition of new varieties. Doubtless the per 
capita consumption of the cheaper food products does somewhat 
increase from hard times to good ; the dinner pail that is relatively 
full is a reality. But in the main — and especially in the long-time 
tendency — elasticity manifests itself mostly in the substitution of 
more expensive products for the less expensive — of wheat for 
corn or rye, bread for potatoes, meat for cereals, fruit for vege- 
tables, wine for eider, champagne for wine, and generally in the 
addition of new luxuries, new delicacies, new tastes, and new 
flavors. Eating and drinking what the men of to-day actually 
eat and drink, it may take more acres of land to support the human 
being of to-day than were required a hundred years ago for his 
predecessor. 

The statistics, therefore, that go to show that the per capita 
consumption of corn has appreciably augmented with the past 15 or 
20 years should probably be interpreted to mean not that more 
corn is actually consum.ed as such, but rather in some derivative 
form like meats or sirup or starch or breakfast foods. Similarly, 
also, with wheat, though probably not in the same degree. 

But whatever these statistics precisely mean, they at least suffice 
to discredit the long-accepted legend of practical inelasticity. The 
Government Crop Reporter of April, 1912, affirms "that in the 
last 10 or 15 years substantial increases in the prices of agricultural 
products have occurred in every important country in the world. 
. . . Coincident with this upward trend of prices, the world's 
production . . . has also been increasing and at a rate faster than 
the increase of population. The world's per capita consumption 
of agricultural products in the last few years has probably been 
larger than at any previous period. . . . 

"Wheat. ... In 10 years there has been an average increase 
in the yield per acre of about 8 per cent and an expansion in area of 
about 15 per cent. . . . 



458 THE ECONOMICS OF ENTERPRISE 

"Corn. ... In the five-year period 1895-1899 . . . the crop was 
about 2,759,000,000 bushels ; in the next five years, 2,905,000,000 ; 
in the last five years, 3,543,000,000; ... an average increase of 
nearly 2.8 per cent ... a year. . . . From 1895-1899 to 1905- 
1909 the oat production had increased 27 per cent . . . barley 38 
per cent . . . rye 7 per cent . . . five cereals ... 25 per cent. 
" Animal products. . . . The world's supply in 

1905 1910 

cattle 403,958,000 448,796,000 

sheep 544,382,000 605,333,000 

swine 137,260,000 137,846,000 

"... Such figures indicate that the aggregate supply of animal 
products . . . has kept pace with population during the past 
decade." 

Noting the fact that food products have increased faster than 
population, and that the rise in prices of the past 15 years has been 
especially marked in food products, it is clear that the inelasticity 
in food consumption has been greatly exaggerated. Relative in- 
elasticity there doubtless is, but still an appreciable degree of 
elasticity in the absolute. 

It is, then, safe to conclude that agricultural rents cannot greatly 
rise with the advance of technique in agriculture and transporta- 
tion, but that, on the other hand, the fall, if there is any fall, must 
be inconsiderable. 

With urban rents, however, the tendency is quite other. (See 
Chap. XIII.) 

But in any case the conclusion is inevitable that improving tech- 
nique in transportation and increasing supplies of equipment have 
much the same effect on land rents and on the prices of agricultural 
products as would attend an increase in the supply of land. The 
point of especial theoretical significance here is that no one can 
know accurately whether, on the whole, the relation of freight cars 
to land is a complementary relation or a relation of substitution. 
If, then, classification be made to depend on technological relations, 
and only that be called land which competes with land, and only 
those intruments called capital, as distinguished from land, that 
are complementary to land and that tend to make land relatively 
scarce, no one can now know, or is certain ever to know, whether to 
call a freight car land or capital. 



CHAPTER XXV 

COSTS IN CORPORATE AND LARGE BUSINESSES 

New industrial organization, — An earlier chapter (VI) 
has discussed the cost computation of an entrepreneur en- 
gaged in a typically small and relatively simple business, 
like that of the farmer or the retail merchant. But how far 
is this analysis appropriate to the affairs of the giant in- 
dustrial plant. In what degree does the traditional en- 
trepreneur analysis apply to the corporate organization? 
How, for example, does the cost analysis present itself to the 
International Harvester Company? More and more is 
business assuming the corporate organization. And more 
and more, also, it might be added, is the corporate organiza- 
tion tending in the direction of monopoly. But monopoly is 
not directly a part of the present problem. (See Chap. 
XXXI.) 

Corporate versus individual cost. — On the face of it, the 
cost problem as presented to the corporation would appear 
to call for no very serious modification of the preceding 
analysis. True, the managers of corporations are them- 
selves salaried men, receiving wages from their employers, 
the corporations, rather than deriving profits from their 
individual activity. Thus, corporate managerial activity 
— in the profit-receiving sense — dwindles to a minimum. 
But we have already seen that wages and profits are received 
under the same title of reward for personnel activity, and 
that the distinction is, for many purposes, not of great im- 
portance. And some remnant of the profit which the stock- 
holders receive is doubtless compensation for their supervision 
of the enterprise. They have ultimate legal authority, and 
recurrently in legal contemplation — and sometimes in 
actual fact — select the personnel of the management and 
determine the policies of the business. With the stock- 

459 



460 THE ECONOMICS OF ENTERPRISE 

holders is the risk of loss, as also is the hope of dividends ; 
all of their ownership interests center, indeed, in the dividend : 
they are investors looking for returns upon their invested 
funds. The officers are merely the appointed agents or 
stewards. Included in dividends, therefore, is some frac- 
tion of true profits — the rewards of an attenuated discre- 
tion and direction in the selection of the investment to be 
entered into and in the choice of the employees to have 
charge of it. The stockholders are, in substance, joint entre- 
preneurs. In fact, there are in the entrepreneur function a 
variety of activities. Some of these are more detailed and 
more clerical in nature than others, but all are personal 
activities and are remunerated as such. That a part, the less 
responsible part, are delegated to selected employees, leaves the 
residuum of remuneration none the less a remuneration for 
personal activity, a wage impersonally received from the 
market without the intervention of an employer. The 
dividends are, then, in part, true interest ; in part, higher 
gains received because of the danger of smaller dividends or 
of loss of the principal ; in part, gains on risk in excess of the 
cost of carrying the risk ; and in part, albeit a small part, 
a reward for the entrepreneur function of ultimate choice 
and supervision. 

But no matter how strong is the case for regarding the 
stockholders as entrepreneurs, it still stands as true that 
the business of the corporation is to make dividends and that 
these are in the main a return upon invested funds, a return 
which is to be apportioned ratably among the stockholders 
according to the size of their holdings. The corporate quest, 
like other quests, is for the largest possible net return upon 
the business. Gain solely is in contemplation ; but these 
gains are in no appreciable measure conceived as profits 
in the technical sense of returns for gainful activity, but 
rather as interest upon invested capital. 

Profits on stock operations. — Surely in many cases the owners 
of the stocks do reap true profits. But these occur, not in the course 
of the conduct of the corporate affairs, but in investing or dealing 
in the corporate stocks. If, for example, the aggregate stock invest- 
ment of 1,000,000 dollars turns out to reap returns of 10 per cent 



COSTS IN LARGE BUSINESSES 461 

upon the investment — and to promise as well for the future — the 
stocks will register a market price of approximately 2,000,000 dollars 
instead of par. This means that the property which cost 1,000,000 
is worth 2,000,000 ; it really pays 5 per cent on the new valuation, 
not 10 per cent on the old. There has, then, already accrued a 
profit of 1,000,000 dollars, expressed as an 1,000,000 dollars increase 
in the market value of the property. Certainly a part of this in- 
crease is accurately to be regarded as an indemnity for risks under- 
taken and part as a return upon personal cleverness or wisdom. 
Room here for profits in the strict sense there surely is. The only 
question is what part is to be attributed to each function, what part 
interest, what part profit. 

But this profit evidently does not accrue in the regular conduct of 
corporate affairs, but is rather a gain to one who is operating in the 
stocks of the corporation — an external matter rather than an internal. 
The business of the corporation is the carrying on of the corporate 
business. The affairs of any individual stockholder are another 
matter. In the corporate business there is, then, small place for 
profits in the strict and technical sense. 

Profits of corporation versus profits of managers. — But even 
admitting that corporate profits may accrue in the most limited and 
technical sense of the word, they concern the case only as material 
for dividends, the ultimate purpose of the corporation. 

And precisely as a distinction is necessary between the business of 
a corporation and the possible operations of the individual owners of 
its stocks, so another distinction must be drawn between the opera- 
tions of the corporation and the possible, and probable, operations 
of the management. Profits are easily possible for the managers by 
ways not strictly interior to the corporation or logically a part of its 
processes. It is not uncommon for the managers to reap a purely 
personal reward for a personal activity which is a mere plundering 
of the corporation whose interests they are appointed to serve. They 
may, for example, vote themselves prodigal salaries, especially if they 
have the strategic advantage of owning or controlling considerable 
amounts of stock. Or they may in one way or another directly ap- 
propriate the corporate money without waiting to have it voted. 
Methods of this sort are, however, too crude for the really finished 
and artistic operators in corporate mismanagement. Nor do the 
higher levels of good form and of clever workmanship now permit 
the adept to own industries along the line of the railroad and to 
make himself especially favorable freight rates, or to sell to the 
corporation his own product at especially high prices, or to buy from 
the corporation his supplies at special concessions, or to deny to his 



462 THE ECONOMICS OF ENTERPRISE 

competitor the privilege of sidetracks or the use of freight cars. 
Doubtless all these different iniquities are practiced, but they dis- 
credit the corporation manager as a bungler and a novice. He is 
now a vulgar fellow who stoops to mere commonplace and obvious 
stealing. No matter what may still remain his standing in polite 
society, the code of reputable business has ceased to tolerate him. 
EQs methods are not refined enough to comply with the later stand- 
ards of high finance. They are no better than pilfering from the 
till, or plundering one's chief, or betraying a specific trust, or selling 
out a cHent, or defrauding a ward. All these things the business 
code of morals now outlaws. 

Many things, however, the corporate manager may still do without 
offense to the estabhshed code. Here, again, the distinction between 
the corporation and the stockholder is important. Decency denies 
the manager permission to plunder his corporation, but he has not 
yet been deprived of the privilege of plundering both present and 
prospective stockholders by buying stocks from the one and selling 
them to the other. Nothing, indeed, could be easier or simpler : 
The manager has only to utilize his inside information for purposes 
of operations in the stock markets, buying from existing holders 
when the stocks are seen to be unduly low and selling when the 
stocks are overhigh. Or better yet : If the company has so pros- 
pered as to earn good dividends and as to register a high value for its 
stocks, the next step is to mismanage it and to sell stocks, or to sell 
futures in stocks, and then to mismanage — a reaping of gains so 
easy and so certain as hardly to merit the name of speculation. Or, 
again, if the business has been mismanaged, an equally generous gain 
may be had by " going long " in the market and managing the 
property well. Or the management — e.g., Mr. Harriman and his 
friends in the Union Pacific — may determine to raise the dividends 
from 8 to 10 per cent. Pending this, they may buy heavily from 
the existing stockholders to the end of selling later at from 20 to 40 
points of profit. And thereafter, say a year or two later, it will be 
time enough to discover that 10 per cent was too high a dividend 
for the business to stand — whereupon another equally large total of 
plunder may be had by speculating for the fall in stocks, which may 
be relied upon promptly to follow the announcement of the lower 
dividend. There is, indeed, no good reason why a very wealthy 
individual or group of individuals may not, in the multiplicity of 
great corporate undertakings, have always in process one, or two, or 
several of these safe and gainful manipulations. And after each 
campaign the next will be easier; with the proceeds still more 
may be financed. 



COSTS IN LARGE BUSINESSES 463 

But assuming for the moment that the management is 
seriously trying to earn the maximum possible dividend — 
an assumption which equally may or may not be valid — 
it is to be noted that none of these stock exchange operations 
have rightly to do with the computations by which the cor- 
poration arrives at its costs and determines its output either 
of commodities or of services. The gains are not to be re- 
garded as profits as the result of the activities of the cor- 
poration proper, but as the collateral diversions of the 
managers. 

Monopoly and cost. — The necessities of the present analysis com- 
pel immediate reference to reasonings belonging in strictness to 
monoply theory : 

It is commonly said that the theory of monopoly price 
diverges from competitive theory by the very fact that, in 
monopoly production, cost is not appealed to as the explanation for 
the volume of supply, — that cost bears upon price only as it bears 
upon the supply side of the market equation, — that the peculiar 
advantage of monopoly is that it may fix the supply where it will, 
and that the monopoly control over price rests solely in the power of 
determining the supply. 

Such is, indeed, the truth of the case. The theory of monopoly 
is simple, when once the competitive analysis has been made clear. 
It is, however, possible to reduce the computation by which a monop- 
oly fixes supply to the terms of the cost analysis. Assume for 
illustration that, as a matter of the providing of a plant and of the 
other necessary burdens of production, a monopoly can afford to 
place upon the market anywhere from 50 to 100 units of product at 
an expense of 50 each ; and assume that the demand is such that one 
unit could be sold at 100, 2 at 99, and so on down. Evidently, the 
maximum gain for the monopoly is found in selling 25 units at a price 
of 75, and at a gain of 25 per unit ; 25 X 25 is the largest parallelo- 
gram to be plotted inside of the triangle ; 26 units at 24 of gain, or 

24 units at 26 of gain, would give a total gain of 624 ; 25 units at 

25 of gain gives a total of 625. 

With changes in either the curve of supply or the curve of de- 
mand, changes must come in the point at which a restriction of 
product will return the maximum gain. A deal of experimenting 
may be necessary in practical affairs in order to develop the facts as 
to demand or as to supply. But the general principle is clear. 
And the possibility of stimulating competition or of arousing public 



464 THE ECONOMICS OF ENTERPRISE 

agitation or adverse legislation may doubtless advise the monopoly, 
as a long-time policy, to impose exactions something short of the 
maximum possibility. And if, as is commonly the case, a monopoly 
is only partial instead of complete, there arises the question of how 
effectively to limit the aggregate product and to arrive at a working 
apportionment of it. 

But in any case, the cost analysis may without undue violence be 
extended to cover the problem. At its broadest, the cost law indi- 
cates the point at which product, or added product, cancels as many 
price-measured facts as it adds to the aggregate selling price ; pro- 
duction ceases at the point at which price costs are at balance against 
price product. The monopoly application of this principle is as 
follows : On the credit side of the account is computed the incre- 
ment of product at the new sale price which attends its production ; 
to be charged against this total addition of selling price are (1) the 
extra outlays of production, and (2) the loss in price suffered by the 
earlier items of product through the addition of the new items. The 
point of equation between the two sides of the account is the limit 
upon production. 

In actual fact, however, restrictions of product rarely follow the 
method of first determining the volume of product and then of leav- 
ing it to the market to absorb this product on such terms as may be 
fixed by the competition of buyers. The more common method is 
to fix the selling price and then to sell only such product as the mar- 
ket will accept at the price. But it still holds true that the higher 
price is possible only on terms of the restriction of product. By this 
method of limiting the product at the amount which will be taken at 
the price, the adjustments necessary under partial monopoly are 
more readily made. The producer controlling a very large propor- 
tion of the total productive capacity may commonly dictate the 
price at any given time. The smaller competitors find it better 
worth their while to adhere to this price than to precipitate a 
struggle for larger sales through a price-cutting competition. 

Characteristics of giant industries. — Irrespective of any 
monopoly features, the conditions under which the great 
industrial undertakings are carried on are in sharp contrast 
to those of farming or of any other typically simple line of 
production : 

(1) The farm may be used for any one of many different 
products, in case any particular product brings disap- 



COSTS IN LARGE BUSINESSES 465 

pointing returns. In fact, that the returns from any partic- 
ular product are unsatisfactory is likely to be due to the 
more flattering prospects offered by some other product. 

The railroad or the rolling mill, on the contrary, is adapted 
only to a relatively specialized line of production. 

(2) Farming is easily entered into and easily abandoned. 
There are always men looking for farms to hire or to buy; 
the farmer's implements and stock are easily salable to other 
cultivators or upon the general market. 

But the giant business with its extensive and specialized 
plant cannot well withdraw. It has commonly no one to 
sell to. The plant is good for little else than its original 
purpose. The railroad cannot cease to be a railroad or the 
rolling mill a rolling mill. The only thing, or the least dis- 
astrous thing, is to go ahead, even though no dividends 
accrue to the stock and little interest to the bonds. The 
nature of the service, to say nothing of the heavy fixed charges, 
makes even a temporary suspension an impossibility or a dire 
calamity. Insolvency means merely that the bondholders 
take the property, to run it for the same purposes and under 
much the same conditions. Such cost computations, there- 
fore, as really parallel the simpler cases in the preceding 
chapter are forward-looking computations applicable only 
to a specialized plant. Cost, as the necessary indemnity 
for the bringing forth of supply, is cost as an inducement to 
begin rather than as indemnity to continue, and is a long-time 
and slow-moving force in working itself out into modifi- 
cations of the supply. Doubtless this forward-looking 
computation is actually made, but it contemplates a long- 
time average of market conditions, and has small bearing 
on the policy of any particular season or year. There is, of 
course, always some flexibility of policy with regard to wear- 
out and up-keep, but even here the choice has narrow limits. 
It is commonly better to keep up the property — in some 
more or less adequate fashion — than to abandon it entirely. 
Thus, the lower limit of selling price is close to the operating 
charges for labor and raw materials, plus the most urgent of 
up-keep costs. 

(3) The individual farmer supplies only an infinitesimal 

2h 



466 THE ECONOMICS OF ENTERPRISE 

share of goods which have almost a world market, and for 
any particular kind of crop faces what is, for him, an in- 
definitely elastic consumption. Not so with most of the 
giant businesses. With the railroad, for example, no great 
modification can be wrought in the supply of services which 
can find a market. Changes in the rates imposed will only 
slowly develop a larger traffic. For any short-time compu- 
tation, the volume of traffic to be moved or of passengers to 
be served is not greatly subject to change ; about so much 
business can be done and not much more, no matter what 
may be the rate. The ultimate determinant in the case is 
the size of the population and its industrial efficiency. Thus, 
modifications in the demand for services and in the equip- 
ment to supply this demand do not readily take place and 
arrive tardily, if at all. 

And even when the particular plant is not tied to a certain 
area of traffic, the weight of the goods and the expense of 
distant marketing, or the defensive price making of com- 
petitors may greatly restrict the practicable area of operation. 
Or the product may be one in which the fluctuations in 
demand are not marked and in which the aggregate of 
consumption responds slightly or slowly to concessions in 
price. 

(4) Farming does not lend itself readily to the giant or- 
ganization. The farmer may, it is true, advantageously 
handle more land than his own labor will call for, but the 
limit of practicable size is never remote. The right pro- 
portion between entrepreneur and land requires that each 
farmer confine himself to a necessarily restricted area. Thus, 
not only for farming in the aggregate, but for each individual 
cultivator, higher prices mean a more intensive cultivation at 
a constantly rising margin of cost. 

But in the industries susceptible of the giant organization, 
and especially in the industries requiring a relatively heavy 
investment in specialized equipment, the wider the market 
and the larger the output of any one competitor, the lower 
may fall the cost of production per unit of product, and the 
stronger, therefore, the trend toward larger units of pro- 
duction and of organization. That these economies of pro- 



COSTS IN LARGE BUSINESSES 467 

duction touch no limit on the hither side of monopoly is 
commonly not true, but it is clear that they ordinarily go so 
far toward monopoly as greatly to reduce the number both 
of plants and of competitors and as greatly to facilitate the 
process of combination. Perhaps, also, it is true here that 
competition comes finally to be of a most disastrous sort, 
which can be escaped only by combination. 

Costs in giant competitive production. — In determining, 
therefore, at any given time, the costs of product and 
in fixing the volume of product to be marketed, the giant 
competitive business confronts a twofold problem : (1) In 
what degree, if at all, does the existing plant figure in the 
cost computation, beyond those extra expenses of up-keep 
which the current product imposes? Insurance and rent 
and decay are items of expense that do not wait on product. 
(2) What is the relation between the extra cost and the extra 
selling price which, once reached, is effective to veto any 
further extension of production? When and why comes 
the point of stopping? 

Temporary cost does not exclude loss. — Recalling that 
the end in view is always the widest possible margin of net 
gain — the maximum fund for the payment of interest on 
bonds and dividends on stocks — and that the years to come, 
as well as the current year, must be taken into account, it 
is again apparent that actual loss may be accepted rather 
than permit an established clientele to be scattered or an 
efficient body of employees to be dispersed. Or it may be 
that the tangible plant may be better and more cheaply 
protected from depreciation by operating it than by allow- 
ing it to lie idle to rust and decay. Temporarily, then, the 
necessary returns from operation may not be inconsistent 
with some degree of loss — the minimum of loss possible 
in the situation, a loss accepted as the condition on which 
an even greater loss is avoided. In truth, the original in- 
vestment was entered into in full view of the fact that times 
of wide margins alternate, in the general run of things, with 
times of meager margins, or even of loss. And precisely 
because the long-time cost computation is a forward-look- 
ing computation, it comes about that the aggregate of plant 



468 THE ECONOMICS OF ENTERPRISE 

and equipment in any industry is adjusted to the prospective 
long-time average of the market. Despite frequent asser- 
tions to the contrary, it is not true that the productive equip- 
ment is always and generally in excess of the needs of the 
market, in any other sense than that, as new plants are 
constructed with the latest methods and appliances, other 
plants are either already out of date or are approaching their 
fate of displacement. There is, then, always this supply 
of marginal equipment, falling partly on either side of the 
line of abandonment, some of it starved of up-keep and pro- 
gressively deteriorating, some of it held idly in reserve 
against the temporary emergency of a brisk demand, but 
all of it obsolescent and destined shortly to the wrecker or 
the scrap pile. Adequacy, for long-time purposes, then, 
makes it inevitable that the existing equipment is more than 
adequate for times of depression and of limited consumption, 
and yet is correspondingly short of adequacy for the periods 
of brisk demand. 

Idle plants. — In those lines of production in which the costs of 
delivery are especially high and in which, therefore, the plants have 
to be widely scattered to serve the trade of separate fields, it is 
probable that some unemployed plants — plants which are a tem- 
porary surplus in their special fields — are almost always to be found. 
And it is probably true, also, that each competing firm or corpora- 
tion may find that emergency plants in times of high prices afford 
gain sufficient to more than balance the losses of nonuse in dull times 
and to justify the maintenance of a volume of equipment somewhat 
greater than the average year will employ. With faUing rates of 
interest, also, this balance of gain from emergeneey plants becomes 
doubtless somewhat more marked. When combination occurs, 
these marginal or submarginal plants are the plants likely to be 
dismantled or to remain closed at all times other than those of a 
very high pressure of demand. In large part, indeed, the surplus or 
reserve plant is maintained by the buying out of new or weak or 
failing competitors. 

Three possible cases. — The business policy of the pro- 
ducing concern must then be considered under each of 
these three possibilities : (1) a normal or average market, 
(2) periods of brisk demand, (3) periods of depressed demand. 



COSTS IN LARGE BUSINESSES 469 

(1) Average conditions. — The period of average or normal 
demand is the time when most of the plants will be operated 
at the volume of product to which they are best adapted. 
It is not really true that a given plant can indefinitely ex- 
tend its output at a constantly lowering cost per unit of 
product. The lowest cost is at the ideal capacity. It may 
well be true that a more extensive plant could attain to 
still greater economies, if only the average level of demand 
were such as to justify the larger plant. Possibly, also, the 
long-time trend toward better technique in the factory, and 
toward lower transportation rates, may make for wider 
areas of marketing from one center, for larger industrial 
units, and for lower costs per unit of product. But it is 
not true that the maximum economies of production are 
possible for any plant through the largest possible output 
of product. Hather is it true that for more product, the 
plant should have been larger. More machines to a given 
space, more men to each machine, more machines to the 
existing power, more raw material in the actual yard room, 
more raw material to the limited storage capacity — all 
these are sins against the law of the proportion of factors. 
They imply and involve increasingly wasteful processes of 
production. Thus, for example, in 1907, the pressure of 
traffic was so great upon the railroads of the American west, 
the congestion so acute, as to increase the unit costs of serv- 
ice and as probably to justify the claim of the roads that 
their rates must be advanced in order to avoid a substantial 
loss in net revenue. The " bumper " crop may easily attain 
a size to spell misfortune to the railroad inadequately 
equipped for the emergency task. Nor, obviously, — ex 
vi termini, — can any railroad wisely go far in maintaining 
a permanent equipment for emergency tasks. This is, in- 
deed, hardly better than a truism. That a business is at 
any particular time suffering either by overequipment or by 
underequipment, means that the proportion of factors best, 
in the average and in the long run, for price results, is tem- 
porarily not the best. Were the new and higher level of 
demand likely to be permanent, the plant would reasonably 
call for enlargement. But, if, for long-time purposes, it be 



470 THE ECONOMICS OF ENTERPRISE 

regarded as undesirable to make an all-around increase in 
the plant of any railroad or industrial unit, the best equip- 
ment for temporary purposes must be reached through a 
proportioning of factors which would be a maladjustment for 
long-time purposes. 

But our present assumption is that the adaptation is 
precise between capacity and demand — an assumption 
which evidently will rarely hold, either for any particular 
plant or for the aggregate of productive capacity. To in- 
crease the product for any plant so adapted will, it is true, 
return a gain upon more items, but will cut into the average 
gain per item. Nor is it possible to enlarge the sales from 
any one plant excepting upon terms of a cutting of prices 
in order to attract trade away from competitors. This, were 
it done, would finally defeat its own end ; a larger volume 
of purchasing would be stimulated by the lower prices, and 
a volume of products would be called for too large for the 
best conditions of cost. The marginal gain from each item of 
product would, therefore, suffer in two ways — by higher 
costs and by lower prices. 

(2) Exceptionally favorable conditions. — Evidently, how- 
ever, the chances are indefinitely great that the actual situa- 
tion will not be that one to which the plant is best adapted. 
Assuming now that the demand is brisk, that the market 
call for goods has established a level of prices making it 
possible for the plant under consideration to reap larger 
gains by pushing its product beyond the volume to which, 
as a matter of the economies of production, the plant is best 
adapted — where shall the limit be fixed? Allowances 
must be made here for the courtesies of competition, the 
degree in which trade solidarity is recognized, the prevailing 
code of fair competition — a code commonly the better 
accepted, the smaller the number of competitors. Some- 
thing of the principle of combination will be recognized, a 
notion, obscurely held and indefinitely applied, of the gen- 
eral good of the order. These incompletely competitive busi- 
nesses will, indeed, allow themselves to be led into a consider- 
able straining of capacity, but none the less will commonly 



COSTS IN LARGE BUSINESSES 471 

draw the line an appreciable way short of that product which 
each individual interest, exclusively considered, would advise. 
The prices will no doubt be higher, but will not be allowed 
to induce a volume of product imposing a very serious rise 
in the cost levels of production. A wide average margin of 
gain upon a somewhat increased volume of produce will be 
preferred to the narrower margins possible with a greatly 
increased volume of product. 

As a question of principle, however, we are not the less 
interested to understand the manner in which an increasing 
cost is attached to an increasing product. It is evident 
that to assign to each machine a larger number of operators 
or to each operator more assistants and tenders, is a policy 
which must early set its own limit. Some overtime may 
doubtless be obtained from the existing corps of laborers. 
But this commonly involves an extra rate of pay for the 
overtime and, if long continued, reacts unfavorably upon 
the efficiency of the laborers per hour. If the increase of 
market demand is very great, a second shift of men may be 
engaged. But it is not practicable to run the full plant with 
a half quota of men ; and enough efficient laborers are not 
commonly available for merely a four- or five-hour daily 
shift. Again, when all employers in the industry are call- 
ing for more labor, men of a high grade of efficiency are not 
easily found at a wage to permit of their gainful employ- 
ment. Night labor is likely to be expensive in its ratio of 
product to outlay. 

(3) Adverse conditions. — The years of restricted con- 
sumption present a problem more difficult of analysis. 
Meager or vanishing returns upon the investment are, as 
we have seen, probable. But here, again, it must be kept in 
mind that the largest possible net gain or, if loss must occur, 
the smallest possible net loss, is the end in view. The 
nearer the plant can be run to its normal capacity, the lower 
may be the unit cost of the goods, and the larger the volume 
of products over which the fixed charges — e.g., interest and 
insurance and managerial expense — may be spread. The 
temptation, then, is to maintain the product at its norm 



472 THE ECONOMICS OF ENTERPRISE 

through the offer of special concessions to the clientele of 
competitors. But retaliation is forthwith inevitable ; and, 
as the probable outcome, a demoralized market and serious 
losses. To avoid these complications and to fend against 
these losses is one of the strongest forces making for combina- 
tion. In the lack of concerted action in this direction for the 
elimination of competition, there is nothing for the case but 
to appeal to the code of fair competition, with its partial 
recognition of the solidarity of trade interests. 

A simple illustration will make clear these dangers in competition : 
Suppose that Mrs. A and Mrs. X are rival boarding-house keepers, 
each with, say, 15 boarders, at a weekly rate of $5 : to what limit 
can Mrs. A afford to cut the rate in order to lure from Mrs. X's 
establishment one of Mrs. X's boarders? No extra burden of rent 
or heat or hght or table furnishings or services need attend this 
additional boarder. The extra outlay for raw materials is the only 
necessary debit. Evidently, then, Mrs. A may enjoy a margin of 
gain from a price from this extra boarder, which, applied to all her 
boarders, would mean insolvency. If this extra boarder will prom- 
ise not to divulge his special rate — and will keep faith — he may 
have his board, say, at $2.50. 

Nevertheless, Mrs. A will be unwise in making this attack upon 
her friend, the enemy, across the street. If only Mrs. X will also 
keep the peace, A may well be careful not to disturb it. If either 
opens the price-cutting contest, there is nothing for the other to do 
but to follow suit. Special concessions will become general, and the 
common rate for all the boarders will fall to a level at which the 
boarding-house business is an impossibility. The only thing either 
safe or practicable is to recognize a standard of "fair competition" 
and to abide by it. 

So pools and combinations. — For precisely similar reasons the 
railroads find it necessary either openly or secretly to restrict their 
competitions. When traffic is scant, no appreciable extra expense 
attends the making of a freight train a car or two longer. If, by 
concessions in rates, this surplus traffic may be procured at the 
expense of competitors, whatever small increase in receipts there is 
is so much extra gain for the rate-cutting road — provided only that 
this rate can be kept a secret from the other patrons and that the 
other roads do not meet the attack with similar methods. 

Monopoly present in degree. — The limitation upon com- 
petitive supply is, in truth, arrived at by processes at vari- 



COSTS IN LARGE BUSINESSES 473 

ance with the ultimate logic of competition. The tempta- 
tions toward surplus product, or toward price cutting upon 
some portion of the product, are controlled through a more 
or less consistent recognition of the solidarity of trade in- 
terests and of the necessity of sacrificing a direct and imme- 
diate individual gain to the interests of the aggregate good 
of the trade. Whoever provokes a war of railroad rates, 
or a contest in price cutting, shares with the rest in the re- 
sulting disaster. He would better abide by the expressed 
or tacit " gentleman's agreement." The penalties bind 
him even if his promise does not. 

There are, nevertheless, fields of activity in which the 
principle of community of interest has thus far received 
small application. Surplus product — that part of the 
product not marketable at the level of the average unit 
cost — may be disposed of in some foreign market without 
either inevitable or probable demoralization of the domestic 
market. Especially is this opportunity of surplus market- 
ing abroad open to a domestic monopoly or to different com- 
peting producers behind the walls of a protective tariff. 

To summarize : Cost in the ordinary sense applies to the 
industries of expensive equipment only as a forward-looking 
and long-time average cost against average return. For the 
short-time or seasonal period, it applies only so far as these 
expenses are expenses that can be attributed to any specific 
portion of the product, and applies then only as fixing a more 
or less elastic limit to the volume of supply. If the cost com- 
putation is to be serviceable as explaining the extent and the 
limitation of the supply of any particular time, under the 
modern conditions of giant and specialized undertakings, 
items of debit not commonly taken into the account in the 
traditional cost analysis will have to be included. The cost 
law, at its broadest and most inclusive statement, indicates, 
as we have seen, the point at which product or added product 
cancels as many price-measured facts as it adds to the total 
of sales in terms of price. The theory here is, in substance, 
not unlike the theory of monopoly. 



CHAPTER XXVI 

COMBINATION AND MONOPOLY 

Definition. — Monopoly is the antithesis of competition. 
As there is the more of the one, there is the less of the other. 
Either is, therefore, a matter of degree. So monopoly ranges 
all the way from an approximately complete control of a 
market situation, down through the partial monopoly to 
the point of disappearance in the even competitive level. 
And inasmuch as in the degree that there is competition 
to that degree there is not monopoly, it is bad usage to at- 
tach the term monopoly to cases, say, of the ordinary owner- 
ship of land. If there is any competition anywhere, it is 
precisely in agricultural production; of all people the 
farmers are most individualistic, least prone to organiza- 
tion, and least likely ever to reach it. Neither with land nor 
with other property is the receipt of a rent the distinctive 
characteristic of the presence of monopoly — but only of 
ownership. 

To define monopoly as the absence of competition is simple 
enough and clear enough, if only competition were already defined 
or were easy of definition. Either, but not both at once, will suffice 
for the other. But precisely because competition is the harder to 
define, it is perhaps the better place to make a beginning. 

Competition defined. — In its widest and most inclusive, but 
not in its technically economic sense, competition is a state of mind, 
a temper, an attitude. So far, indeed, is it a state of mind that it is 
an institution. Every institution is, in fact, an established similar- 
ity of thought and action as, for example, manhood suffrage or 
representative government. To speak of competitive economic 
institutions suggests the fact that in business affairs men act individ- 
ualistically and selfishly, and without regard to the welfare of 
others as an end in itseh:. The thought includes, also, something 

474 



COMBINATION AND MONOPOLY 475 

more than rivalry or emulation ; the end of economic competition is 
individual gain in terms of price ; the purpose is separatist in motive 
and in working, rather than cooperative and collective. 

In essentials, therefore, the higgling of traders is competitive. 
Buyers and sellers are bargaining each to the end of getting as much 
as possible for himself out of the other and of giving as little as 
possible. The temper is one of antagonism, of contest, of direct 
self-seeking at the other's prejudice, or, at least, without regard to 
the other's welfare. 

But this is to push the meaning of the term further than ordinary 
economic usage permits or connotes — though not further than it 
should logically go. Psychology and ethics would pronounce the 
relations between demand and supply competitive, as surely they 
are if submitted to the test of temper and purpose. But competition 
as an economic term is usually narrower than this. It has not to do 
with the relations between the two sides of the price equation, but 
only with the relations between different operators on the same side 
— with the relations of producers of a particular article to other 
producers, or of sellers with sellers, or of buyers with buyers. But in 
any case competition implies that each actor is separately and in- 
dependently and selfishly seeking his own individual maximum of gain. 
He acts by himself and for himself. Any pooling of interests with 
other interests, or any slightest consideration of other interests, is 
inconsistent with the concept. The competitive man is, in his 
psychology, as solitary a hunter as a cat. Spiritually, he is as 
isolated a thing as a billiard ball, an atom, a monad, a star. All 
things that he does he is set to do by himself and for himself. His 
plans may be far reaching, but they do not intend the gain of any 
other ; neither courtesy nor good will — nor, for that matter, ill 
will — can have any part in the case. In strict logic there is no 
place for qualities hke consideration or gratitude or courtesy or 
envy or revenge or ill will in the whole dull lexicon of gain. It 
suffices that men will do what they agree to do where it is wise, 
know what is going on, recognize their own interests, and pursue 
them rationally, consistently, unswervingly. 

Combination implies, then, the restriction of competition, in the 
sense merely that some of the men, not the less competitive in spirit, 
are acting together in order better to carry on the fight against all 
the rest, whether sellers or buyers. There is in some measure a 
pooling of issues to the common interest of the members of the pool 
— a pack hunt, not in any weakened zest for gain, not less ruthlessly, 
but only jointly, in groups — a small center of peace or a vortex of 



476 THE ECONOMICS OF ENTERPRISE 

contractual calm, around which, but not within which, the immiti- 
gable strife goes on. Some small leaven or adulteration of coopera- 
tion gets into the case, but it is a cooperation to the end of a more 
effective working out of the purposes of competition. 

Monopoly is merely combination, the restriction of competition 
— competition carried to higher levels. At the logical hmit of com- 
bination all competitors in the ordinary technical sense, all individ- 
uals upon the same side of each demand and supply equation, would 
be harmoniously organized — competitively grouped within the 
common fortifications — the guns all pointing outward against the 
common foe, the other side of the market. 

Monopoly competitive in purpose and origin. — It is, then, evident 
that in temper and purpose, combination and monopoly are not less 
competitive than the so-called competition of the technical terminol- 
ogy, but are merely a more effective form of competition. There 
is a small oasis of peace within the barrier, in order that there may be 
a bitterer and more destructive war against outsiders. It is still a 
hunt for gain, but it is under the better technique of the pack organ- 
ization. As a league, both of offense and of defense, it may indeed 
go so far as to erase the necessity of the defensive function — with a 
more than compensating gain in its efficiency of offense. 

Nor, in fact, are these cooperations and communities of interest 
more than superficial. In ultimate purpose and in final result, the 
original individualistic and separatist motive still prevails. It is 
true merely that cooperation presents itself to the individual as his 
best method of achieving his original and unchanged purpose of 
individual gain. On the scent or in the fight he makes common 
cause with his pack. But in the division of spoils he is still a soHtary 
eater. The means change, but the end persists. Whatever other 
and different thing, better or worse, the cooperations of socialism 
might imply, the principle of brotherhood exists no more inside than 
outside the actual modern corporation or partnership or trust. 
Combination, as we shall shortly see, is merely another aspect or 
stage of competition, or a corollary of it. 

Good and ill in competition. — It is true, though perhaps 
the emphasis upon the truth has been somewhat overdone, 
that any scheme of social organization which should exclude 
all phases of economic competition would involve the loss 
of important advantages. As there is ill in competition, so, 
also, there is good. And as there is good in the extension 
of governmental functions, so, also, there is ill. In the ideal 



COMBINATION AND MONOPOLY 477 

adjustment of things it could hardly be best — and in the 
actual on-going of things it is not credible — that the future 
see the application of either of these antagonistic prin- 
ciples to the exclusion of the other. In human history things 
move rather by the adjustment of cut and try and compro- 
mise than according to logical and schematic and thorough- 
going systems of thought or action. The future, then, 
will probably retain each of the two principles where its 
working is salutary. The problem will be in finding the lines 
and points of adjustment best promising to retain the good 
that is in each principle and to avoid the bad. Govern- 
mental regulation is occasionally a wise and necessary com- 
promise between the two opposing policies. 

Broadly viewed, economic competition on the part of 
producers is an attempt to undersell one another, to find 
a profitable way of offering — or appearing to offer — more 
for less. On the part of buyers, it is an attempt to get most 
for least. Speaking generally, and subject, as we have seen, 
to important limitations, it is a method by which one mem- 
ber of society gets m.ost from society by rendering the larg- 
est service. So far, it is, in outworking, a defective but auto- 
matic method of proportioning rewards to benefits. And it 
is fairly clear that in the absence of the ingenuity which 
competition has stimulated, the economic progress achieved 
by the race could hardly have been possible. 

Laissez faire. — But that the interests of society are 
greatly subserved by the elastic energy and ingenious ini- 
tiative which belong to individual interest and which ob- 
tain their fullest manifestation in the competitive system, 
does not compel the admission that social interests are in 
every case subserved by the fullest play of individual in- 
terests. The interest of each is not always parallel to the 
interest of all. Even if the interest of each were always 
rightly understood by him, it would not always conform to 
the social interest. And if the individual not only goes 
wide of the social interest, but of his own as well, there is not 
the less, but the greater, divergence between social and in- 
dividual interests. 



478 THE ECONOMICS OF ENTERPRISE 

It does not strike the individual, for example, that he is greatly 
interested not to pollute the springs and streams below him. He is 
interested that a rule should exist against pollutions generally, and 
that other people should obey the rule, but not that he himself obey 
it. So, open and closed seasons for fishing and hunting are neces- 
sary for the aggregate good ; but the better the laws are observed by 
others, the greater the advantage to you and me from violating them. 
The very existence of monopolies rests upon the fact that while a 
large social product is for the aggregate good, a restriction of produc- 
tion in the special hne of each producer is often of enormous advan- 
tage to him. So, again, it is for the comfort of the lucky possessor of 
four seats in the passenger coach that he lounge upon them all, 
while fellow travelers stand. Something like a government is 
necessary here in the presence of the conductor. Likewise it is well 
for the government, through a policeman, to stand at the street 
crossings and adjust the conflicting interests of foot travelers and 
traffic; otherwise you and I could never get across the street. 
Almost all crimes against property illustrate the antagonism between 
the individual and the general good. One of the aims of socialism 
is to escape this clash of interests ; perhaps, however, this is just 
where it will fail. How shall any one find strenuous effort to be for 
his own interest? If he produce twice as much, his share will be 
increased by one ninety-millionth, — no great matter. As a prac- 
tical question, each will be interested simply that every one else 
work nimbly, wliile he himself takes things easy. It is hard, even 
in the small horizon of a schoolroom, for the individual to see that 
he must in his own interest guard the privileges and comforts of all. 

Wastes in competitive production. — While it is true that 
in competition there are strong tendencies toward economies 
in production, it is equally true that in some cases competi- 
tion brings about great wastes. While it often results in 
improvement in the quality of the product or in reduction 
of prices, in other cases it results in the wasteful multipli- 
cation of retailers, in the dear cheapnesses of adulteration 
and " scamping," in the false pretenses of advertising, 
in bad sanitation and bad hygiene for men and women, and 
in the moral, mental, and physical disasters of child labor. 

Mere fact of laws discredits laissez faire. — If the indi- 
vidual's understanding of his own interest conformed at 
all times to the social interest, the need of laws would mostly 
cease. The doctrine of the economic harmonies runs close 



COMBINATION AND MONOPOLY 479 

to anarchism. On the other hand, no purely socialistic 
scheme is justifiable, unless upon the assumption that there 
is no distinguishable and retainable balance of benefits in 
any of the tendencies of competition. 

Competition often self-destructive. — But some of the tend- 
encies of competition seem destructive of its primary char- 
acteristics ; for, from one point of view, be it repeated, 
combination and monopoly are mere aspects of competition. 
It is a commonplace that the extension of the giant industry 
at the expense of the small is a competitive product ; so 
of the tendency toward corporate organizations, — toward 
trusts, pools, monopolies, and the other forms of organized 
industrial combination. But these secondary aspects of 
competition differ in the degree in which they retain the 
primary competitive characteristics. In proportion as 
they fail of this, they become awkward of treatment to the 
economist and perplexing to the moralist and legislator. 

No harm in mere size. — There is nothing of especial 
seriousness in the mere organization of industry on a large 
scale, though considerable is to be said of its benefits — and 
dangers. But sufficient room remains for the competitive 
feature in the rivalries of numerous producers ; while, at 
the same time, organization seems possible to a sufficient 
extent to obtain all or nearly all of the possible economies 
in production. With some others of the different lines of 
industry (for example, with transportation industries and 
with industries in which the costs consist largely of trans- 
portation outlays, as in the coal, oil, water, gas, and electric- 
light industries), the maximum economies in production 
seem possible only on terms of the exclusion of competition. 

No harm in mere economies of size. — Now, it is evident 
that these resulting economies are not the sources of any 
considerable evil or perplexity; the awkwardness of the 
case lies in the fact that, competition being excluded, it is 
practically certain that society will get none of the advan- 
tages of these economies, but that, on the contrary, the low 
price possible to the monopoly will discourage all outside 
competition, and the monopoly be thereby enabled not only 
to reap the entire benefit of its possible economies, but to 



480 THE ECONOMICS OF ENTERPRISE 

collect from society something over and above the price 
which would prevail under the full and wasteful action of com- 
petition. And not only is competition avoided by the 
superior advantages of the large combination, but it is also 
destroyed by the method of cutthroat competition, — the 
trial of financial endurance in doing business at a loss, — or is 
prevented by the menace of it. 

Monopoly costs and profits. — The theory of monopoly 
profits is a development from the theory of value. The 
normal competitive price is the price remunerative to 
the long-time marginal sacrifice in production. This price 
may be considerably lower than that possibly obtainable 
from some or all consumers, were such higher price imposed. 
With some commodities, a change in price does not greatly 
affect the disposition to consume. In these cases a con- 
siderable advance in price is possible, with no considerable 
reduction in sales, but with severe encroachment on that 
indefinite quantity indicated under the term " consumer's 
surplus." (See Chap. V, p. 51.) It is the consumer's surplus 
which the monopolist manipulates to appropriate. The 
extent of his operations will be limited at the outside by the 
point at which his increase in profit, by reason of increased 
price, approaches an equality with his decrease in profit 
on account of diminished sales. This adjustment is a sepa- 
rate problem for each industry ; and the danger of attracting 
competition may fix a lower limit in price than the theoret- 
ical limit above indicated. 

The monopoly principle finds frequent illustration. Fruit 
occasionally becomes so plentiful in the market as to sell for almost 
nothing. Half as much would sell for more. The price must go 
so low that all of the supply can find buyers. If the sellers could 
combine, it would be to their advantage to withdraw a half of the 
supply, and, if need were, let it rot. Again, one could hardly give 
away a hundred bananas to ten ordinary people for their own eating, 
yet could probably sell one half or one fourth as many at a very 
appreciable price. Not many decades ago an English company, 
having a monopoly of the spice trade, sank a whole shipload of 
spices off the coast of England. These cases further illustrate that 



COMBINATION AND MONOPOLY 481 

antagonism between utility and price already many times re- 
marked. 

The trend toward monopoly. — The proposition that where 
combination is possible competition is impossible, would 
be approximately correct if changed to read that to the extent 
that combination is possible competition is impossible. 
But we are unable to determine the extent to which methods 
of combination may be applied. There are certain industries 
which seem rightly termed natural monopolies. Most or 
all of these depend to a peculiar degree on the use of natural 
opportunities or natural forces, or are intimately associated 
with the industries of transportation. To the degree that 
the sources of supply or the number of producers is limited, 
combination becomes more feasible and more dangerous. It is 
forcibly claimed that a large proportion of all such monopolies 
are made by legislation or are permitted by legislation. To 
what degree, if at all, this is true will not be here discussed. 

Purchasers' combinations. — Some attention must be 
given to combinations among purchasers. These are com- 
monly more subject to competition and are less durable than 
producers' combinations ; but, in theory, the analogies are 
close between the two. 

We have seen that, in the long average, price cannot fall 
below the marginal producer's sacrifice ; it may remain above, 
though if perfect competition exists, this marginal sacrifice 
is to be regarded as indicating the normal price. If neces- 
sary, a large number of producers could afford to produce 
and sell at lower than the market price. It is evident, 
therefore, that by actual agreement or by tacit understand- 
ing among the purchasers in any given market, the price 
paid can be to a large extent controlled, to the positive loss 
of the marginal producer, and to a diminution of the gains 
of all the producers above the margin. The buyers' com- 
bination is an attack on producers' surpluses, parallel to 
the attack, through sellers' combinations, upon consumers' 
surpluses. It is true that this buyers' combination must 
result in a restriction of the supply to the extent that the 
lower price discourages producers at or near the margin of 
2i 



482 THE ECONOMICS OF ENTERPRISE 

production; but as to producers above the margin, the 
opportunity will still remain to the combination buyers 
of appropriating a considerable share of the producers' mar- 
gins. To the extent, clearly, that the total supply in the 
consumers' market is diminished by the combination tac- 
tics of middlemen, market prices will tend toward advance, 
and a corresponding additional gain accrue to the operators ; 
and if, as sometimes happens, these operators are at the same 
time in practical control of the selling market, the diminished 
expense of combination buying may be made the source of 
additional gain in combination selling. 

It is asserted that the purchase of cereal products in rural 
markets illustrates the working of buyers' combinations, 
and that the meat-packing industries of the United States 
illustrate the cumulative effects of the double combination. 

Monopoly and restricted supply. — It may, indeed, be 
said that, in the main, competitive theory and monopoly 
theory do not diverge, that the supply and demand analysis 
applicable to competition applies without change to monop- 
oly, and that monopoly differs from competition only in 
the fact that in monopoly the volume of supply is under 
centralized control, while in competition the limit of supply 
is found in marginal cost of production. 

So presented, there appears to be little to say about 
monopoly in this aspect of the case. The analysis is sim- 
plicity itself, when once the competitive market analysis is 
thoroughly grasped. The only problem, in conducting a 
monopoly, appears, indeed, to be the purely administrative 
problem as to the wise point of limitation upon the supply, 
with its corollary, the determination of the market price. 
Saved costs and higher prices on the one side are to be set 
over against a smaller total of sales on the other side, all to 
the purpose of arriving at an adjustment promising a maxi- 
mum of gain. And, as we have seen, all these adminis- 
trative computations are susceptible of reduction to the 
traditional cost categories. (See Chap. XXV.) 

The pressure toward monopoly : Economies of production. 
— Our task is rather to subject to theoretical analysis the 



COMBINATION AND MONOPOLY 483 

forces which are either leading or driving industry into some 
one or another of the various forms or degrees of monopoly. 

Were the only force making for monopoly the added 
economies of production attaching to the increasing size 
of the technological unit or to larger business organization, 
it is probably safe to say that the cases of monopoly would 
be few. There are, doubtless, advantages of these sorts — 
in cheaper buying, in more economical selling, in avoidance of 
cross freights, in smaller outlays for advertising and for com- 
mercial travelers, and also in some measure in a more 
efficient central management or in better proportions be- 
tween the managerial factors and the other factors. 

Most of the advantages of giant production or of large 
organization are, however, reached and passed, a good way 
on the hither side of the last possible step of integration. 
All that is needed is the great size. The economies which 
monopoly adds to size are of minor importance. The busi- 
ness with ten thousand or twenty thousand employees has 
access to as many economies as a business several times as 
great ; or, if this be not always in strictness true, it avoids 
as many wastes in other directions. The advantages, then, 
that go with size imply, obviously, a small number of com- 
petitors, but do not require the elimination of competition. 

The chief inducement to monopoly lies in the advantage 
of monopoly buying and of monopoly selling ; and the chief 
means of bringing about or of maintaining a monopoly — 
where it is not cordially entered into — is in the use of cut- 
throat competition. The fact that, at the ruling level of 
monopoly prices, the margins of gain are wide is not sufficient 
to attract competition, if it be equally clear that so long as 
competitors are in the market there will be no margins 
at all. 

But the advantages of monopoly buying and selling are 
so great as commonly to avoid the necessity of discipline 
or compulsion. Competitors are ordinarily anxious enough 
not to remain competitors. The advantages in prospect are 
however not mainly in the achieving of wide margins of gain, 
but more commonly in the avoidance of occasional serious 
loss. The forces which render competition dangerous among 



484 THE ECONOMICS OF ENTERPRISE 

heavily capitalized industries (see Chap. XXV) are the very 
forces which push most compellingly toward combination. 
Only on the basis of some more or less thoroughgoing accept- 
ance of the monopoly principle is the menace of insolvency 
to be avoided. The magnates of the giant industry are in 
this respect submitted to the necessities of the modern situa- 
tion and are powerless against it. Cheap transportation 
has made the giant industry possible by making possible 
the purchasing of raw materials and the marketing of prod- 
ucts over a wide area from one center. But these same 
lower costs of transportation have taken from each pro- 
ducer his relatively distinct and separate market, have made 
each the competitor of all the others everywhere, and thus, 
for businesses of heavy investment in fixed capital, have made 
unrestricted competition impossible. There is nothing for 
them but to divide the field by agreement, or to divide by 
agreement the business of the general field, or to restrict 
by some other method the competition in this general field. 
Combination or coalition is as necessary to giant production 
as are pools or communities of interest or consolidation to 
transportation companies. The economies of combination 
on the technical side have unquestionably been greatly 
exaggerated, but the disastrous price cutting of competition 
has been even further from adequate recognition. If so- 
ciety is to have the products, the investors must be permitted 
to follow those methods which alone can provide an ade- 
quate return upon investment. 

Unwise legislation. — To show, therefore, that the exac- 
tions of monopolies are in large part made possible by over- 
protective tariffs and by unwise patent laws, or to prove that 
the narrowed field of operations inside the tariff barrier has 
much simplified the problem of successful organization, 
is not at all to indicate that the trust problem can be solved 
by the reduction or abolition of tariffs or by the much needed 
reform or repeal of the patent laws. Trusts are merely more 
easily formed under favoring legislation and are more ex- 
tortionate under the fostering of tariffs. But there is no 
reason to believe that they would fail to exist under impartial 
legislation and free trade. Looked at from the point of view of 



COMBINATION AND MONOPOLY 485 

the investor, the need of combination would simply be the 
greater. It would probably be as easy now for the Steel 
Corporation, with its half billion of surplus from ten years 
of operation, to organize the steel industry of the world as 
it was originally to organize the American field. And under 
free trade this need would be the more imperative. 

Control. — The necessary inference from the foregoing 
analysis is, then, (1) that combinations are inevitable, (2) 
that regulation is equally inevitable. Monopolies cannot 
be allowed to do whatever they will. Competition, if it 
could endure, would itself be regulative. But when com- 
petition disappears, other regulation must take its place ; 
there is no third possibility but uncontrolled exploitation. 

In some cases probably this regulation will have to go as 
far as the limitation or the fixation of selling prices. But 
in any case, (1) profits of promotion will have to be limited ; 
(2) the issues of securities supervised ; (3) the separation 
of ownership from control, through various combinations 
of securities, prevented ; (4) full publicity required ; (5) 
interlocking directorates prohibited — though this is likely 
to avail little ; (6) adequate taxation imposed ; (7) progres- 
sive participation by government in the dividends provided 
for. 

The combinations of trusts. — It is well, however, to see 
the ultimate problem clearly. The trusts are serious enough, 
and the problems directly and obviously connected with 
them are sufficiently difficult ; but the great and the menac- 
ing problem is less obvious and much more serious. It is 
in the individual and group controls that lie back of the 
trusts.^ It is, in substance, the progressive movement toward 
a trust of trusts. 

^ " There are not merely great trusts and combinations which are to 
be controlled and deprived of their power to create monopolies and 
destroy rivals ; there is something bigger still than they are, and 
more subtle, more evasive, more difficult to desl with. There are 
vast confederacies (as I may perhaps cnll them for the sake of con- 
venience) of banks, railways, express companies, insurance com- 
panies, manufacturing corporations, mining corporations, power and 
development companies and all the rest of the circle, bound together 



486 THE ECONOMICS OF ENTERPRISE 

Monopoly features in all business. — But for theoretical 
purposes it is more to the purpose to note the fact that there 
is in almost all prosperous businesses a very considerable 
element of monopoly. For example, the average market 
price of bank stocks in any great city is probably 25 points 
above the liquidating value. This differential is in the earn- 
ing power of the going business, its established connections, 
its clientele and its reputation. That these things are capi- 
tal is sufficiently proved by the selling price. The best 
asset of the Ivory Soap Company, as Professor Veblen has 
wisely remarked, is the motto, " It Floats." So, the value 
of a newspaper property is commonly mostly in what is 
known as its " good will and subscription list." This sort 
of thing is likely to have been costly of attainment ; but, 
costly or not, it is. It may, without expense, have attached 
little by little to pioneership in the field — to the mere fact 
that the business is now a long-established business. But, 
in any case, it is a differential advantage against which new 
competitors must wage a long and costly contest in achieving 
an equal footing. Nothing is harder or more expensive to 
establish than a successful newspaper in a great city. In 
the main, it is not worth trying. The gains of the older 
business are thus mostly safe from competition. Thus, 

by the fact that the ownership of their stock and the members of 
their boards of directors are controlled and determined by compar- 
atively small and closely interrelated groups of persons who, by 
their informal confederacy, may control, if they please and when 
they will, both credit and enterprise. There is nothing illegal about 
these confederacies, so far as I can perceive. They have come about 
very naturally, generally without plan or deliberation, rather be- 
cause there was so much money to be invested and it was in the 
hands, at great financial centers, of men acquainted with one another 
and intimately associated in business, than because anyone had 
conceived and was carrying out a plan of general control ; but they 
are none the less potent a force in our economic and financial 
system on that account. They are part of our problem. Their 
very existence gives rise to the suspicion of a ' money trust,' a con- 
centration of the control of credit which may at any time become 
infinitely dangerous to free enterprise. If such a concentration and 
control does not actually exist, it is evident that it can easily be set 
up and used at will." — Woodrow Wilson, Speech of Acceptance, 
Aug. 7, 1912. 



COMBINATION AND MONOPOLY 487 

in the very definition of the term, here is monopoly. And 
this monopoly is something that, in differing degrees, attends 
almost all established businesses — • some of it an increment 
richly earned, some of it the mere good fortune of priority, 
but all of it capital. Many great banks manifest, as we have 
seen, an earning power out of all proportion to their assets, 
an earning power which competition appears safe never to 
menace. 



CHAPTER XXVII 

THE SOCIAL DIVIDEND AND THE INDIVIDUAL INCOME 

Ultimate income is psychic. — All income, whether social 
or individual, must finally resolve itself into the use of the 
good things in life that are only to be attained at some sort 
of cost. Money incomes, of course, there are; and as in- 
termediates toward ultimate incomes they are of supreme 
importance. But their real significance rests solely on what 
can be had from them and for them. Ultimate income is 
not the cash received, nor even the things which the cash 
will buy, but the benefits which these things render. In 
the ultimate sense, then, money income resolves itself into 
what Professor Fetter has termed psychic income — that is 
to say, into the unfree utilities which the money indirectly 
and the goods directly afford or control. 

The aggregate income. — Before inquiring, however, what 
individuals come to enjoy the good things which bear a price 
or which could command a price, and why and how these 
individuals come to this enjoyment, we must inquire what 
good things there are to enjoy and whence these good things 
come. What is production? and who and what are pro- 
ductive? But in thus formulating, for the present purpose, 
our question, we are not inquiring as to what things are 
individually gainful, how individuals get money incomes for 
their own purposes, but only what is, in the ultimate sense, 
the total product in society to be enjoyed. We are set to 
examine, from the social point of view, the aggregate dividend 
of society, the distrihuendum. 

But note that, from the social point of view, we have no 
concern with those things which are merely useful as dis- 
tinguished from valuable. Things so plenty that any one 
can have them for nothing present no economic problems. 

488 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 489 

They are not economized, because they need not be. In 
the economic sense of the term they are not distributed 
through the economic process — which, be it recalled, is a 
price process. 

What things are to be had with money income. — The 
distributive problem relates, then, to the process which 
apportions among the different gain-seekers their various 
quotas of the good things in life — of those good things 
that go at a price, that get into the market, that are bought 
and sold, that may be brought, and are actually brought, 
under the price denominator — the things that one pays a 
price for to get or refuses a price for to keep. Not all good 
things surely are so bought or held ; and there are some that 
cannot be. One does not absolutely have to have a dollar 
in order to believe in the goodness of God and to be comforted 
thereby, though it may require many dollars to be eloquently 
and authoritatively informed about God. One may have 
health with poverty — the more the poorer — though it is 
obviously easier to have or keep the health if one is rich. 
And one may conceivably enjoy both the health and the pov- 
erty. Wordsworth informs us that love may be found " in 
huts where poor men lie " ; nor commonly can any one bar 
another out with a price from " the silence which is in the 
starry sky, the sleep that is among the lonely hills " — un- 
less, indeed, one works and must live where one cannot see 
the sky, and has neither the time nor the car fare to get away 
to the hills. To go is evidently easier with the money ; and 
the hills in the neighborhood may have been allowed to 
become the parks or the hunting preserves of the people 
who have the money. But even if it be admitted that love 
and pity and respect and place are not rarely bought and 
sold upon the market at a price, it is not less clear that not 
all of these are there all of the time. There are offices that 
seek the man as such ; and there is respect for honest pov- 
erty; and there is praise for the scientific discovery that 
pays no dividends ; and there is fame for the singer whose 
songs command no royalties. 

Thus, the distribuendum does not include all of the values 
in life, but only those which, being adapted to the price 



490 THE ECONOMICS OF ENTERPRISE 

denominator, are submitted to it and received under it. 
Whatever the cynics may say, there are some good things 
that money cannot buy, as there are other good things that, 
when bought, are no longer good. But on the whole it 
still stands as true, despite the optimists and the sentimen- 
talists, that the good things in life are mainly for those that 
can pay for them. No one of us really believes that it is 
just as well to have $500 a year as $5000 ; nor is it true, how- 
ever much the well-to-do may comfort themselves with vol- 
unteering this sort of solace to the poor. It is mere smug 
talk. All that can safely be said is that incomes do not 
multiply in service as they multiply in size. And on the 
side of prestige and power and envy, even this is probably 
not true. 

Psychic income dependent on money income. — To ex- 
plain, then, the distribution of the objective things and facts 
which render services to human beings, we must explain 
the distribution of money incomes in society and of all those 
things that, were they exchanged, would command a money 
price. The eggs and butter and garden products consumed 
upon the farm are, it is true, not marketed in the ordinary 
sense, but could be marketed, and thus possess exchange 
power and have a price standing. In strict analysis they 
are really a part of the total market supply, but remain 
with the farmer because his reservation price is greater than 
the market price. Though consumed at home, they are 
incomes. As such, they explain in part what, as tenant, the 
farmer pays in rent, or what, as owner, he might collect as 
rent. 

The primary fact is goods for distribution. — It was made 

clear in an earlier chapter that much which, from the in- 
dividual point of view, is gainful, competitively productive, 
is from the social point of view mere appropriation by priv- 
ilege or by levy of tribute ; and that, in the gain-seeking 
competitive process, rents and time discounts and wages 
are as readily paid for the means and aids to parasitism and 
predation as for the instruments and agents contributing 
to the aggregate social product of those things which satisfy 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 491 

desires. But the purpose of our present investigation is 
to determine what human activities and what human pos- 
sessions contribute to the total satisfaction of desire : what 
are the sources of the social dividend, the aggregate of valu- 
able utilities to be distributed? 

"What are valuable products? — No question can now re- 
main that wheat, cloth, pepper, books, whisky, Peruna, 
corsets, ribbons, automobiles, obscene books, cigars — and 
so on indefinitely — are valuable products and that the means 
and aids to their existence are productive. But it is still to 
be emphasized that no mere means or aid — land or machine 
or raw material — is itself a product in the ultimate sense 
with which the present discussion has to do. Lands and 
machines are merely intermediate or instrumental productive 
facts,employed as means to the end of providing or controlling 
ultimate psychic incomes. Only things of ultimate service 
belong in the social dividend. 

Not quite so obvious, perhaps, but equally as certain, is 
it that all actors, teachers, preachers, physicians, singers, 
servants, gymnasts, ball players, clowns, ballet girls, fortune- 
tellers, heelers, quacks, and prostitutes — who serve for 
hire — are productive. That the services are useful is 
proved by the fact that they are wanted — consists, indeed, 
merely in this fact. That they are valuable is manifest in 
their being paid for. Therefore, they afford ultimate eco- 
nomic income. 

Not all consumption is destruction. — But consumable 
goods are not in all cases identical with destructible goods, 
nor is consumption quite the same thing as destruction. 
The uses of wealth include more than the eating and drink- 
ing and wearing-out of things. Those things which are 
usually called services, as distinguished from wealth, are 
obviously without appreciable duration and, in this sense, 
are consumed as soon as they are produced. And many 
commodities, for example omelettes, are almost as temporary. 
And most wealth, it must be admitted, finds sometime a 
limit to its period of service. But some goods wear out so 
slowly that decades may pass without any serious sign of 
rust or moth or decay or disintegration. Yet even a house 



492 THE ECONOMICS OF ENTERPRISE 

of brick or stone goes little by little to wrack and wreck if 
deprived of current investment in repairs and up-keep. 
And if, with lapse of time, its walls do not disintegrate by 
rain and sun and frost, it will probably suffer from mold 
and rust and discoloration. And though it might objec- 
tively remain intact and unharmed, it must probably some 
day be abandoned as ancient or antiquated or ugly. A 
change in desire suffices to make old a thing still physically 
intact and valid ; witness the frumpy horror that was last 
year a coveted bonnet. By one method or another Time has 
its way with most things. But while they last they are giv- 
ing out their incomes of shelter or convenience or beauty. 
That it takes a long time to consume some goods amounts to 
saying that they render their services over a long period. 

Serviceability may increase. — Moreover, it is possible 
in economics to go over far in the direction of these melan- 
choly musings. Nothing endures, it is true, — but true only 
in the sense that all things change. They may, however, 
change for the better as well as for the worse. An interesting 
ruin may easily be a more valuable property than the original 
castle. It really takes a deal of time to make some things, 
wine for example, sufficiently old. Grandmothers' laces 
and grandfathers' clocks, and violins, and paintings mellow 
in color or tone or texture, or acquire that peculiar romance 
and charm that attach to the antique. If '' fair virtues 
waste with time, foul deeds grow fair thereby." So far, 
indeed, as we know, some things, diamonds for example, 
may never wear out. In any case, however, as the things 
wear on — and perhaps in time wear out — the services 
which they render continue to accrue and to make a part 
in the grand total of goods enjoyed. Pictures, statues, 
bric-a-brac, furniture, diamonds, and automobiles are the 
bearers of a great annual aggregate of valuable income. Like- 
wise lands afford not only incomes of grain and lumber and 
iron, but also incomes of standing and living room, of con- 
venience, of social prestige, of political power, of invigorating 
air, of sun, of shade, of beautiful prospect, of seclusion, of 
conspicuousness. That there are real incomes of these sorts 
is sufficiently proved by the rents which various sorts of land 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 493 

command. If these ultimate incomes in the social sense 
were not there, the payments would not be there. 

Other items in the aggregate. — The aggregate of income 
in any society for any given length of time is not, then, meas- 
ured by the output of immediately consumable goods from 
the shops and factories, together with all the grain, vege- 
tables, fruits, timber, and minerals derived from the land. 
The instrumental equipment of society, with all the labor 
applied to this equipment, does not suffice to explain all of 
the actual product. Nor is the account complete when all 
the valuable services of human beings are included — from 
singers, preachers, teachers, valets, policemen, waiters, 
nurses, physicians, soldiers, lawyers, judges, and all the 
rest ; the valuable services of durable consumption goods 
have still to be included. 

Unmarketed price facts. — Nor yet is the total complete : 
as the vegetables and poultry and eggs consumed at home 
are products, so the housewifely activities of the women- 
folk, their dusting and cooking and bed-making, their errand- 
goings and slipper-bringings and nurse-like ministrations, 
are not to be counted unproductive by the mere fact that 
they are not, in any usual sense, paid for. 

Privilege and power. — And finally, there are incomes of 
privilege, place, power, and repute, attendant in some degree 
upon all wealth, but especially attaching to wealth in ex- 
ceptionally great individual or group holdings. Just as a 
landed estate in England carries with it important social 
and political privileges and opportunities, so in other coun- 
tries the road to general leadership and influence, as well as 
the road to senatorships and cabinet positions and foreign 
embassies, may be sought through the ownership of a bank 
or of a copper mine. To be a railroad magnate is to enjoy 
the peculiarly prized income called power. There is, indeed, 
no possibility of understanding the motives which, in a 
competitive society, prompt men to the accumulation of 
great wealth — and perhaps to its earning — till the notion 
of income is expanded to cover all of the ultimate psychic 
advantages which wealth controls. The miser's income 
from his coins may be more than the washing of his hands in 



494 THE ECONOMICS OF ENTERPRISE 

them, or than the enduring consciousness that he could 
spend if he would. He may also be deriving great joy from 
imagining how people will admire him when he comes to 
spend, or how they would admire him if, contrary to his pur- 
pose, he should ever come to spend. Some present income, 
also, there is from dollars to-day in the mere fact that they 
will command other incomes to-morrow. This may be 
bad for some of the theories of abstinence, but it must be 
accepted. 

It is not to be denied that some of these incomes are pos- 
sible only on terms of a net loss to other incomes. Privilege 
and power and pecuniary glitter may impose upon others a 
burden greater than is the gain to those who achieve. So- 
cially viewed, the costs may outrank the products. But 
there are still the products. It may likewise be true in 
competitive enterprise that the net results of the individual 
undertaking may not indemnify the outlays ; but it would 
be still worse if there were no results at all. Probably, also, 
much of the current product in society fails to justify the 
pain and stress of its production : but it is none the less prod- 
uct. The wastes of competitive production are everywhere 
great, but this is not to deny that there are products from 
competitive production. 

Various distributive processes. — To make clear in what 
the aggregate product of society really consists has been a 
necessary preliminary to the examination of the process by 
which this product is distributed among the different in- 
dividual claimants and participants. This process the cost 
analysis, looked at in its distributive aspect, greatly illu- 
minates but does not entirely explain. Much of the prod- 
uct of society — possibly one half or two thirds of it — reaches 
its final recipients by gift. Consider for a moment the dec- 
orative women, the children, the invalids, the paupers, 
the insane, the prisoners. Nor are gifts of this sort all of 
the gifts that there are. Remember that, in the main, our 
present problem concerns itself with the distribution of 
purchasing power in society. Taxation, for example, is one 
method of distribution, or of redistribution. In large part, 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 495 

doubtless, taxes are collected for services which the contrib- 
utor receives, and are disbursed to the payees for adequate 
services rendered. In some part, nevertheless, this comfort- 
ing general truth does not hold : there are sinecures — as, 
for example, with most of the large postmasterships. There 
are fat contracts, pensions, royal bounties by princely spend- 
thrifts to clever courtiers and to thrifty politicians. And 
there are education at the public expense, and hospitals and 
asylums and prisons. 

Some part, truly, of his tax outlays the entrepreneur may 
compute as costs in his enterprise, but this is possible only 
so far as the tax burdens are imposed by the enterprise. 
Consumption taxes and income taxes and all general prop- 
erty taxes that are truly general, do not fall within the cost 
category. 

Property and distribution. — But more important still 
is the fact that in explaining the distribution, both of ul- 
timate income and of purchasing power, we have to take 
account of property institutions and of the actual distribu- 
tion of property. Much of the wealth in society — wealth 
that is not employed in any intermediate or instrumental 
process, but instead is affording directly consumable income 
— is pure natural bounty. Many of the incomes from land 
are of this sort — practically all of the incomes from residence 
sites, rents of space, convenience, air, sun, prospect, prestige, 
neighborly relations, and pecuniary glory. 

Natural bounty. — There attach, also, to these property 
rights in natural bounty other great incomes which mani- 
fest themselves, as entrepreneur costs, in the process of plac- 
ing goods upon the market. There are, for example, agri- 
cultural rents both of position and of fertility, and there are 
position rents in urban merchandising and manufacturing. 
Out of the 6i billions of real estate values as appraised in 
the city of New York in 1911, 63 per cent were ground values. 
These were ordinary real estate values, exclusive of special 
franchises and of the real estate of corporations. The ground 
values of the great cities average about $1000 per capita of 
population, or say $3000 per breadwinner. The owner 



496 THE ECONOMICS OF ENTERPRISE 

of the land controls its income either in the form of direct 
benefits to himself or in the form of a money rent with which 
to command other benefits. Add to these 4i billions of 
ground values in the city of New York the real estate of 
corporations — 166 millions, more than two thirds of which 
is ground value — and the 481 millions of special franchise 
values, and there is disclosed a great total of 5 billions of 
property bases of distribution which rest solely upon natural 
bounty or community activity. This 5 billions of unearned 
wealth is for the city of New York alone, and attaches solely 
to the land or to the local functions of that city. What this 
means may be in part inferred from the fact that the statisti- 
cians report the total wealth of the country at 120 billions 
of dollars. (See Chap. XXVIII.) 

Franchises. — It is evident that there are important dis- 
tributive influences to be ascribed to what are commonly 
known as intangible assets — property rights like franchises, 
patents, monopolies, and good will. The precise bearing 
of these factors upon the distributive process is difficult of 
analysis ; but they may be divided into three classes : 

(a) With good will commonly, and with patents occa- 
sionally, the individual or corporate revenues may be col- 
lected from something which either is not an added charge 
to the public or has behind it an adequate additional service 
to support the added charge. If any moral or political 
question is involved, it must in such cases refer to the 
extent or duration of the property right and to the ratio 
between deserving and reward. But with natural bounties 
appropriated to private ownership, the question is not 
the reasonableness of the income received, but solely 
whether this income should accrue to private benefit 
under individual ownership. Those who contest most 
vigorously for the right of private ownership in general — 
e.g., the single-taxers — are precisely those who least justify 
the private ownership of natural bounty. 

(b) The second class of cases is where the patent or fran- 
chise or monopoly collects its exactions in charges which 
appear as costs in the entrepreneur process, and which are, 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 497 

therefore, in turn by the entrepreneur collected mostly from 
purchasers, in the guise of the higher prices of the goods pro- 
duced. These exactions thus appear as distributive shares 
apportioned to these monopoly factors in production, which 
factors forthwith take on capital values expressive of the 
present and prospective command of income. Many trusts 
are engaged in supplying products entering as raw materials 
into other processes. By virtue of the restricted supply of 
these materials, the entrepreneurs, conforming to the Law of 
the Proportion of Factors, force higher the prices of these 
materials, and thereby somewhat lower the prices of the 
remaining cooperating factors. Thus the consuming public 
shares with the producers of these other factors the monopoly 
burdens imposed upon industry. 

(c) In the third class of cases the monopoly producer or 
the franchise owner collects his direct gains from the con- 
suming public — which gains are later to manifest themselves 
as purchasing power for the control of ultimate income. 
It is obvious that in the main these gains are achieved through 
the restriction of production. The operators take part of 
the product that is left, as their reward for making it as small 
as it is. 

(d) Franchises, like other monopolies, are commonly 
exploited upon the principle of charging what the traffic 
will bear. Some restriction of service is probable in most 
of these cases — a larger parallelogram of gain, at a smaller 
total of service, but at a wider margin of gain per unit of 
service. In the main, however, these franchise gains are 
more nearly like land rents — where the gains must accrue 
to some one, the sole question being to whom, whether to the 
general public or to private owners. In actual fact, as will 
later more fully appear, private properties of this sort con- 
tribute meagerly to the public revenues, being rarely taxed 
even to the extent intended under the ad-valorem principle. 
The public burdens, that is to say, are in the main imposed 
upon the less questionable classes of property. 

Great wealth as controlling more wealth. — But there is 
more to be said with reference to the relations of large private 
2k 



498 



THE ECONOMICS OF ENTERPRISE 



fortunes to the distributive process. The principle of Ad- 
vantage with Size applies with especial force in this connec- 
tion. It was pointed out in an earlier chapter (X) that 
there is no way by which the joint output of a particular 
complex can be accurately imputed to the corresponding 
factors. Each factor gains by the presence of every other. 
The farmers with the large farms and with generous equip- 
ment of appliances and with adequate working funds are 
proved by statistical investigations to enjoy in the average 
the highest net incomes, after deductions are made at the 
current rate of interest for the services of the invested capital.^ 



1 (From Bull. 295 of Agr. Experiment Station of Cornell Univ. : 
An Agricultural Survey, pp. 400-442, passim) : "The average labor 
incomes varied to a considerable extent with the different town- 
ships, . . . 

"... The owners and tenants in the best townships made nearly 
twice as much as those in the poorest townships. 

"... Over one third of the farmers who operate their own farms 
have less than $4000 invested in the farm business. Less than one 
third have as high as $6000. Of even these small amounts con- 
siderable is borrowed. When we consider the equipment and stock 
necessary to run a farm, we cannot fail to realize how much these 
farmers are in need of capital for conducting the farm business. 
To buy land, house, barns, stock, and machinery with less than 
$4000 is certainly a problem. 

" The necessity for a reasonable amount of capital is shown by 
Table 7. The average owner with less than $4000 capital has not 
made as much money (wage of labor) as a hired man receives. 



TABLE 7. 



RELATION OF CAPITAL TO PROFITS. 
FARMS OPERATED BY OWNERS 



615 



Capital 


Number 


Average 


OP Farms 


Labor Income 


$2000 or less 


36 


$ 192 


2001-4000 


200 


240 


4001-6000 


183 


399 


6001-8000 


94 


530 


8001-10000 


45 


639 


10001-15000 


44 


870 


Over 15000 


13 


1164 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 499 

Nor is this to be explained by the higher average manage- 
rial ability possessed by the men who command the largest 
wealth. The explanation is rather in the fact that it does 

" It has been suggested that the more able men have the larger 
capitals and that the results are due to the man rather than to the 
amount of capital. But most of the men who made successes in 
farming began with small capitals ; there must be some such men 
beginning now. As a matter of fact there are many able men, both 
old and young, who are farming with very little money. If the 
question is one of the man, then these should be doing well. . . . 

" Of 36 farmers with capitals of less than $2001, not one made a 
labor income of $600. Of 236 who had less than 14001 capital, not 
one made a labor income of $1000, and only one made as much as 
$800. The possibihties of large profits with so small a capital do 
not seem very bright. 

"... Of 57 farmers with over $10,000 capital, 20 made labor 
incomes above $1000. Six men who operated their own farms 
made labor incomes of over $2000. Their capitals varied from 
$9185 to $21,786. 

"... The average tenant with a capital of less than $1001 failed 
to make wages. Those with $1001 to $2000 made about the same 
as hired men. The average of those over $2000 was good. . . . 

"... One reason for the low average labor income in the township 
of Danby seems to be the shortage of capital. The few farmers in 
this township who have sufficient capital seem to be doing well. 
These men have much larger farms than the same capital would 
provide in other townships. . . . 

" The tenants on the larger farms also make considerably more 
than those on small farms. . . . 

" There can be no question but that the larger farms are paying 
better. But some persons may say that the difference is due not 
to the size of the farm, but to the farmer, and that the better farmers 
hve on the larger farms. If small farms are the best size, it would 
seem as if the more intelMgent farmers woiild choose them. If the 
more intelligent men all choose large farms, there must be some 
reason for it. Certainly there must be some good farmers Hving 
on small farms. If the small farm offers the best opportunities, 
these farmers should be doing exceedingly well. . . . 

" Of 138 farmers on farms of less than 61 acres, only 10 made a 
labor income as high as $600. Of 234 farmers with over 100 acres, 
79 made over $600. 

" Of 138 farmers on farms of less than 61 acres, only one man made 
a labor income of $1000. Of 34 farmers on farms of over 200 acres, 
11 made over $1000 labor income. . . . 

" In each of the groups the farmer's labor income is almost the same 
as the value of his machinery. . . . 



500 



THE ECONOMICS OF ENTERPRISE 



not pay to work a small farm with its correspondingly small 
equipment. A larger net return to personal earning power 

"... The average owner who is within three miles of the market 
makes about four times as large a labor income as that made by 
those who are over seven miles from market. 



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:e 


)0 


« 

F 





7C 



er 


8 


)0 
C 


9C 




?c 


ICX 
r 


30 



"... On the average the profits are 80 per cent of the value of all 
labor; that is, the farmer's labor income is 80 percent of the value 
of the total labor (Table 58)." 



TABLE 58. RELATION OF LABOR TO PROFITS 
FARMS OPERATED BY OWNERS 



Value op Total Labor 


Labor 
Income [op 
Employer] 


Labor 

Income per 

Dollar's Worth 

op Labor 


$347 

426 

557 


$ 288 

332 
432 
534 
721 
1194 


$0.83 

.78 
.78 


730 


.73 


960 


75 


1307 

Average 


.91 
$0.80 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 501 

can be had in the wage-earning relation. This is one of the 
reasons for the constantly increasing size of the average 
farm. Capital power enhances personal earning power — 
so far, indeed, as it is possible to separate the two.^ Not 
merely in credit facilities, and in other working business 
alliances, and in contests of endurance, but still more in 
the control of official and legislative favors, in inside informa- 
tion, in the ability to carry great risks and to handle enormous 
contracts, to underwrite great stock and bond issues, to 
exclude competitors from equal privileges, to crush them in 
stock exchange raids — do great fortunes grow by what they 
feed upon. If, in truth, the Socialist shall ever find out what 
business capital really means and how it actually works, 
he will learn something about distribution greatly to the 
advantage of his propaganda : and therewith he will come 
to have less to say in explaining the ill plight of labor through 
the separation of it from its tools. Precisely with the so- 
cialistic analysis as with the classical analysis, the capital 
concept errs by its overtechnological emphasis. Wages 
are received in the business process. Business capital is not 
social capital. 

From this chapter or from those that have preceded, it 
should now be clear that the total income of society consists 
of all the different gratifications or benefits at human dis- 
posal, which are held or sold at a price ; that not only does 
all of this aggregate accrue in terms of price, but also that 
it is distributed under the price mechanism, in the form of 

1 And it is here to be noted that for some purposes it is necessary 
for the entrepreneur to make this separation as best he can. He 
must compute his costs, and in computing these he may find it 
necessary to determine how much, in outlay or in displaced earning 
power, a particular factor must be computed to cost him in its 
present employment. It may, and probably does, earn him more 
than it costs ; precisely how much more he is, in the nature of the 
case, unable to determine accurately. For distributive purposes, 
that is to say, all imputations of return are not merely inaccurate 
and unnecessary for the purpose, but are impossible. Whether 
Mr. Pierpont Morgan as an individual earns extraordinarily high 
profits, or his capital earns exceptionally high interest, neither 
Mr. Morgan himself nor a,ny economist could determine. (See 
Chap. X.) 



502 THE ECONOMICS OF ENTERPRISE 

price shares — going, that is to say, to the different members 
of society accordingly as they are willing to pay a price to 
have, or to refuse a price to hold, the various forms of ulti- 
mate income ; that therefore the distribution of the social 
income is to be explained through the distribution of private 
money incomes ; that not only is the distribution of this 
aggregate so explained and controlled, but also in large part, 
the particular kind of income which is produced is so con- 
trolled — those members of society who have the ability to 
pay determining what things shall be produced and what 
shall not ; that not only do the possessors of the great in- 
comes determine by their own purchasing and consuming 
the direction which the production ministering to their 
demands shall take, but also, by setting standards for the 
less prosperous classes, determine in large part what the 
remaining production and consumption shall be ; that many 
individual incomes accrue through contribution to the aggre- 
gate social product to be distributed — accrue, that is to 
say, as distributive shares in the cost distribution — the 
primary distributive process ; that many others accrue by 
gift, by inheritance, by sinecure, by interest on public se- 
curities, by patents, by franchises, by ownership of natural 
bounty, by monopoly, by adulteration, by fraud, by ruse, 
and by theft ; that not even all the shares in the primary 
distribution are received through producing something of 
social service, but only by producing something that some 
one will pay for — often, also, by preventing some part of 
that production ; that salaries may as easily be earned by 
defeating justice as by furthering it, by protecting brothels 
as by closing them, by divulging an employer's secrets as 
by keeping them ; that therefore this price distribution of 
the aggregate price income of society has in it no warrant 
that the shares received out of it are the correlatives of 
worthy contribution to it, or of any other contribution to 
it, or even that they are not derivative from interferences 
with it or from previous subtractions from it. 

The next chapter, the final one of the book, will again 
emphasize the truth that all gainful activities are productive 
in the sole sense of the term appropriate to the competitive 
economic order, and that all objective bases of continuing 
income to the individual possessor are capital, no matter 
what may be their social significance. The chapter will 



SOCIAL DIVIDEND AND INDIVIDUAL INCOME 503 

also trace the course of development in economic doctrine 
by which the contrary view gained general acceptance, and 
still retains it. Having pointed out the unparalleled resources 
of the American continent and their rapid exploitation by 
the most vigorous industrial people of this or of any other 
time, and having thereby emphasized and established the 
extraordinarily high per capita product of American industry, 
the chapter will sketch the relations between economic capital 
and modern social welfare, and will indicate the relations of 
the great fortunes of the rich to the poverty of the poor. 
Out of this analysis the conclusion should be inevitable that 
not the mal-expenditure of incomes, but the mal-receipt 
of them, is the fact fundamental to present practical evils ; 
that therefore the primary problem in American affairs 
is the distributive problem — a problem having its basis 
in a great institutional situation of property in natural 
bounty, in privilege, and in exploitation. 



CHAPTER XXVIII 

THE DISTRIBUTIVE ANALYSIS IN THE LARGE 

Purpose of this final chapter. — In a discussion having to do 
with so many different problems and with so many different 
aspects of each one of these, the essential unity of the ex- 
position is likely to be obscured. Somewhere and somehow, 
therefore, the scattered threads and shreds of the converging 
argument must be assembled in order to present their es- 
sential unity. The problem, then, and the excuse for the 
present chapter, is to get things together, to summarize the 
salient points in the argument, to make definite the point 
of view, and to emphasize the doctrinal unity of the various 
separate discussions. In the very nature of the case there 
must go with this, not only the risk, but the certainty, of 
repetition in essential thought. Occasionally, indeed, in 
the interests of emphasis or of clarity, the writer has allowed 
himself the privilege of substantial repetition, and not rarely, 
also, the discourtesy of literal duplication. 

Historical doctrines. — Repetition need not, however, 
burden the first steps of the immediate task. We shall begin 
with the attempt to trace the derivation of certain central 
doctrines which furnish the dominant issues of later theoreti- 
cal controversy — doctrines, also, which in the opinion of 
the present writer converge to the making of one stupendous 
error — or perhaps better, one great group or congeries of 
errors — doctrines which it is the main purpose of the pres- 
ent volume to attack and to refute, and thereafter, if possible, 
to replace with something less wide of the truth. In any 
case, an adequate understanding of current issues will be 
appreciably forwarded by an examination of the derivation 
of the particular doctrines under consideration. 

There are several of these : (1) the doctrine of unpro- 

504 



DISTRIBUTIVE ANALYSIS IN THE LARGE 505 

ductive labor, (2) the Guidance of the Unseen Hand, (3) 
Natural Law; and as the synthesis or conclusion from all 
these, (4) Laissez Faire. First of this triad of subordinate 
and concurring doctrines — first in importance if not in 
time — is the doctrine of unproductive labor (and of un- 
productive consumption) — a doctrine the parent form of 
which long since passed away, but which is still very present 
with us in its progeny. The importance of these must serve 
as the excuse for a somewhat extended discussion. 

Unproductive labor. — Barring the socialists, who still 
upon occasion exploit this view with propagandist fervor, 
it may be said that there is to-day no one to deny the pro- 
ductivity of the preacher or singer or actor or teacher or man 
servant or maid servant. If the artisan who constructs a 
violin is productive, so, also, is the artist who plays it. If 
to grow wheat or to grind it is economic production, so is 
baking it. If we may regard as productive the industry 
which furnishes the beef, so may we also the industry that 
cooks it. If a stock car is productive in transporting beeves 
over wide intervals of space, so likewise must be the waiter 
who brings the steak from the kitchen or passes it at the table. 
And precisely as we pay for the transportation of com- 
modities, we pay to have ourselves transported. If a freight 
car is capital, so is a Pullman. One colorist with his brush 
fixes his fancies upon canvas ; another color worker by the 
magic of his words paints pictures on the tablets of the mind ; 
the fact that we pay for either shows either to be value 
rendering. To create matter is in truth given to none of us ; 
we only arrange and combine and distribute. iNor, indeed, 
is the very existence of matter better than a hypothesis.) 

All this is clear enough in these latter days, though not 
yet fully accepted in all its implications. But at an earlier 
time the case had a different seeming. Nor even now are 
we entirely quit of our confusions ; ever and anon the older 
doctrine echoes faintly into our time. 

Shifting center of interest : Cameralistic doctrine. — 

Economics is always pragmatic in spirit ; the problems of the 
time dictate its emphasis, its methods, and its standards of 



506 THE ECONOMICS OF ENTERPRISE 

appraisal. The beginnings of economic science were, there- 
fore, dynastic in interest. The economist of that time was 
the Cameralist, a specialist and an expert in stewardship. 
His problems regarded only the prince's welfare in the admin- 
istration of his estate. The various flocks upon the plains 
— two-legged as well as four-legged — were to be husbanded 
and, in the times and manners proper to them respectively, 
to be shorn, the ends proposed being simply the maximum 
possible revenue and the highest level of dynastic prosperity. 
Mercantilism. — But with passing time, the center of 
interest shifted. National problems were taking the place 
of dynastic problems. With this change of interest there 
took place in some measure a recasting and a reformulation 
of economic doctrine. Attention turned from imperial 
wars and bickerings, and from kings and their trumpetings, 
to questions of the growth of peoples and to the extension of 
their power in territory, in wealth, and in influence. The point 
of view remained, however, consistently national as dis- 
tinguished from individualistic and personal, and competi- 
tively national as distinguished from social or cosmopolitan. 
It was the era of the Mercantilist, the specialist in the art 
of national merchandising, of finding markets abroad, of 
selling things to the outsider for money, of excluding the 
outsider from the home market, of compelling him, if he 
did sell, to take home with him goods instead of money — 
all to the end of getting his money from him and of keeping 
it — a policy summing np in the emphasis upon a favorable 
balance of trade. How, indeed, shall any people grow in 
economic power as against its neighboring enemies? By 
piling up wealth, by goodly accumulations of munitions and 
moneys and credits against the time of conflict. And how 
shall any man or nation become wealthy, except by selling 
more than buying, by keeping consumption under pro- 
duction? And how so well extend your personal economic 
dominion over your neighbor and over your neighbor's 
possessions — his desirable daughter included — as by getting 
him into debt to you ? Or how so well render yourself strong, 
and at the same time your competitor nation weak, as by 
getting it into debt to you, or, better yet, by getting its pur- 



DISTRIBUTIVE ANALYSIS IN THE LARGE 507 

chasing power into your own control, through cornering its 
medium of exchange? And how accomplish all or any of 
these things unless by selling your victim neighbor or nation 
more than you buy back? Thus conceived, with the na- 
tionalistic emphasis, the whole question became not pri- 
marily one of income, or of aggregate satisfactions and of 
total consumption, but of accumulation, and especially 
of growth in wealth under the form of foreign credits or other 
ready international purchasing power. 

Physio cracy. — Proceeding from substantially the same 
point of view, the physiocratic school seemed to itself to 
have discovered a method better yet, — accumulation truly, 
but accumulation rather of population than of wealth. 
Artisans consumed as much wealth as they produced ; the 
social cost of their product was as great as their product. 
Manufactures were regarded as, in Dr. Franklin's phrase, 
" subsistence metamorphosed." Agricultural laborers also 
consumed all that they produced or, at all events, all that 
they received as wages, and seemingly must always com- 
mand so small a wage as to make this a permanent fact. 
Whatever the product of labor and land together might be, 
the excess in produce over the laborer's wage and necessary 
subsistence must go to the landowner as the equivalent and 
expression of the productiveness of the land. So with agri- 
cultural, also, as with artisan labor, the social cost canceled 
the social product ; only the land was productive of net 
product. But even so, there was this difference between 
artisan labor and agricultural labor, that artisan labor did 
not increase the total population maintainable in the country, 
gave forth no subsistence product, no life material, while 
the product of agriculture may be regarded as population, 
expressed in the form of its raw material. And it seemed 
clear that national supremacy was rather a question of popu- 
lation than of accrued wealth. 

It followed also that, inasmuch as the laborer received 
only enough to live upon anyway, there was small use, and 
some harm, in trying to tax him. The only man who, having 
a product net, a surplus, could pay was the landlord, the 
rent gatherer. If the laborers were taxed, it must be at the 



508 THE ECONOMICS OF ENTERPRISE 

expense of their number. It followed from this, then, that 
the program fundamental to national greatness was to foster 
agriculture as a life maintainer, the sole source of increasing 
population, and to tax the land. 

The modern views. — Adam Smith, coming into the na- 
tional point of view as an inheritance from earlier thought, 
set himself deliberately to the investigation of the causes, 
and to the formulation of the rules, making for the increase 
of the opulence of nations, and found that while manu- 
factures were productive, they were not so in the same sense 
as agriculture, while labor as mere service was not productive 
at all. The shadow of physiocratic reasoning was still over 
Adam Smith. 

Not having arrived fully and consistently at the indi- 
vidual point of view in economic analysis, John Stuart Mill 
followed substantially in the footsteps of Adam Smith. Un- 
productive consumption is consumption that does not fur- 
nish maintenance for productive labor. Productive labor 
is, in turn, that labor which affords an addition to the aggre- 
gate accumulated wealth possessions of society. Thereby 
he arrived at the distinction between material and im- 
material. But this distinction between material and im- 
material rested not at all upon considerations of utility, of 
importance for consumption in the aspect of service to human 
needs, nor finally and fundamentally upon some test of 
concrete reality, or of tangibility, or of materiality in any 
philosophical sense, but solely upon the aspect of permanency. 
For in a general way, that which is material and tangible 
is enduring ; at any rate, that which is not material, which 
has no substantiality, is mostly evanescent ; in coming to be 
it ceases to be. Thus only material things can add to na- 
tional wealth. And that some forms of material wealth are 
themselves very temporary in their existence, e.g., most 
cooked foods, leaves the line between the material and the 
immaterial none the less an actual line and, at the same time, 
a line which coincides practically with the line between the 
things that add to national accumulated riches and the things 
that do not add. 



DISTRIBUTIVE ANALYSIS IN THE LARGE 509 

All of which was excellent for its purpose, and need have 
occasioned no perplexity or controversy, if only Mill had 
not fallen into the error of following his predecessors in their 
bad choice of terms ; for the line which he was really seeking 
was not that between the productive and the nonproductive, 
or between the material and the immaterial, or between the 
tangible and the intangible, but merely the line between the 
accumulatable and the nonaccumulatable. Interpreting 
his terms productive and nonproductive in this sense, no diffi- 
culty is presented, excepting, perhaps, with regard to the 
significance of the distinction, as seen from the point of view 
of a more modern analysis and of its theoretical needs. But, 
either by strict logic or by analogy, other things followed. 
If material facts only were wealth and material wealth alone 
were economic product, then only material goods were capital. 
The economic process was conceived as strictly an industrial 
and a technical process. The factors of production were 
material factors making for tangible, material, concrete 
results amenable to measurement by weight and tale. Thus 
the different factors of production fell into classes determined 
by their technical relations to a strictly mechanical process 
conceived on large and general lines. The mechanical, 
concrete, industrial equipment at the disposal of human 
energy — also mechanically regarded — was divided into 
two clearly defined and comprehensive classes corresponding 
to the large and general (and essentially vague) distinction 
between agricultural and nonagricultural production, or — 
more accurately — to the distinction between the extractive 
and the nonextractive industries. Hence, in part, the dis- 
tinction between land and capital. 

Capital versus land : Rent cost versus other cost. — From 
the social point of view, also, though somewhat violating the 
technological test, the distinction between land and capital 
was reenforced by obvious differences of origin — the genetic 
point of view. Some part of the material productive equip- 
ment comes by natural bounty, a gift of providence, a racial 
heritage rather than a racial achievement. The produced 
facts — products of labor set aside for further use in pro- 
duction — fitted passably well into the capital category 
already constructed upon technological distinctions. 



510 THE ECONOMICS OF ENTERPRISE 

Analogies from English law. — Perhaps the most important 
corroboration for the distinction between land and capital, 
and possibly the origin of the distinction, is to be sought in 
the jural background of English thought. The civil law 
of England and, in a large degree, the economic, political, and 
social organizations trace back to feudalism, a system in 
which land ownership was the controlling and directing fact 
for almost all purposes, political and economic, theoretical 
and practical. The line of cleavage between real property 
and personal property runs deep through all English juris- 
prudence. 

It would, then, be a most interesting investigation, if 
only one had the necessary learning, to trace out the manner 
and degree of connection between the legal distinction of 
realty from personalty and the economic distinction of 
land from capital. That the parallelism is more than merely 
fortuitous may be taken as beyond doubt. 

The derivative theories. — If the foregoing considerations 
are to the point, adequate explanation is presented for the 
classical habit of confining the field of economics to a study 
of the production, distribution, and consumption of wealth, 
wealth being taken to mean tangible material goods ; for the 
restriction of production to the bringing about of material 
results ; for the construction of categories of material factors 
based upon material items of equipment ; and for the dis- 
tribution of this store of equipment into material nonland 
equipment on the one hand as over against land equipment on 
the other hand. • 

That we, the economists of these latter days, have in- 
herited richly and gratefully from our forebears is equally 
to our credit and to our good fortune. Nevertheless the 
best of the story is yet to tell. We have still to analyze 
the spiritual setting of these doctrines — their soul and heart 
and aspiration — before we can either estimate all that they 
meant to their exponents or all that they have signified to 
us as legatees. Only so can we measure the degree of the 
unfealty of a few of us to the faiths of the fathers. 

We need, that is to say, to note how far a genial optimism 



DISTRIBUTIVE ANALYSIS IN THE LARGE 511 

due to a reverent faith and a reverent faith derived from a 
genial optimism converge to reenforce and to extend and to 
interpret the more strictly intellectual aspects of the classical 
doctrine. We need to know the inspiration and the spirit- 
ual furnishing of the classical view. Filially and un- 
critically, therefore — as becomes the heirs of an estate — 
a few words must be said of the Guiding of the Unseen Hand, 
of Natural Law, and, finally, of Laissez Faire. 

Providence guides. — There are other bases of optimism, 
doubtless, but the readiest is religious faith. Seen in the 
large and in ultimate bearings, things must be going well with 
the world ; else what can God be about ? It is given to none 
of us to thwart the will of the Creator of all of us. Whatever 
we do, we must perforce be working out the great program, 
treading the wine from His presses, milling out the fore- 
ordained grist. It cannot be but that we are playing the 
part for which we have been assigned to the ends of the eternal 
process. However great then may be our ill of purpose, 
there can be no ill in the results. Whether or not there be, 
somewhere or ever, any other good than the good will, 
it is certain that there can be nothing ill but the ill will. 
Whatever wrong we may purpose, and however great the 
guilt of our intent, and however grievous the merited punish- 
ment, there can never anywhere be any guilt of accomplish- 
ment. This is a world where even all ill is good, since this 
is a world ruled by infinite goodness : " God's in his heaven." 

This much granted, — and it is not much to grant for 
the truly religious man or for the truly religious age, — it 
forthwith becomes incredible that the best interests of any 
of us can antagonize the interests of the others, if only it be 
possible to the individual to appreciate things in their ulti- 
mate meanings and their long effects. Somehow each of us 
meets the faith in him that, could he see things farsightedly 
and clearly, self-love and fellow love would find themselves 
reconciled in the moral code as it daily enacts itself in the 
human conscience. The right of our neighbor can hardly 
be wrong to us. The claims of sympathy and the demands 
of duty not only express our obligations to our fellow beings. 



512 THE ECONOMICS OF ENTERPRISE 

but sum up in the highest and truest sense our own well being. 
Somehow the right thing must be the best thing for each 
of us. It cannot do our neighbor wrong; it must be best 
for him as well as for us. It follows, then — as, for example, 
Bastiat argued — that all exchange is a mutual transfer of 
services. All trade is good ; good from the point of view of 
the traders immediately concerned, and good for all the rest. 
International trade especially must be good for both nations. 
Hence a further corroboration of the brave and noble faith 
that all individual interests, rightly seen, must harmonize; 
any clash must be the merest seeming, or somehow real in- 
terests have been misconceived. And even when these mis- 
conceivings are most common and most extreme, the Unseen 
Hand will always — or almost always, or commonly, or at 
all events sometimes — marvelously and providentially set 
things right. It was odd, no doubt, in a world like that of 
Adam Smith's construction, that there should turn out to be 
any such thing as unproductive labor ; and particularly 
was it odd that traders and middlemen should so multiply, 
being mostly parasitic. But at any rate both valets and 
traders could be trusted to become gradually fewer — a 
laggardly and leisurely fulfillment of the divine will, but none 
the less a fulfillment. In general, surely, private gain must 
accord with public welfare. Consumption must take place 
by right of a preceding production. Private gain must trace 
back to social contribution. Capital must be such by 
furtherance of social product. Private income connotes 
a socially earned income. Distribution is solely and ex- 
clusively a division of a joint product among the cooperating 
productive factors. So runs the Great Plan. 

Natural laws control. — Tenuous and unsubstantial rather 
than solidly theoretical, and impersonal and illusive, but 
none the less real and objective and effective, is this same 
doctrine as it presents itself under the guise and sanction 
of Natural Law. The Natural Law philosophy was the 
skeptics' way of saying substantially the same thing; it 
was the old faith unitarianized. Being, moreover, less naive, 
it was less intelligible, and thereby less open to attack. 



DISTRIBUTIVE ANALYSIS IN THE LARGE 513 

And it had the usual merit of vagueness that it might mean 
pretty much anything — little or much or nothing. Better 
than this, also, it was rational, and struck hands across the 
ages with Greek philosophy and with Roman jurisprudence. 
It sounded not a little like the Law of Nations and breathed 
the air of Platonic idealism. But, best of all, it recognized 
and proclaimed a great stream of righteous tendency and 
great reservoirs of compelling force making for the good. 
God or no God, there was — and still is — a world of law 
wherein truth is immortal. Thus the right is destined to 
ultimate triumph ; and progress reigns ; and things essentially 
improve by their own inevitable unfolding; and the soul 
of things is just. Evolution is thereby the last word of 
scientific faith, and the ameliorative trend a popular certi- 
tude. 

If, indeed, all this be not easy to state, it is easy enough to 
feel and to know, as most economists and all good citizens 
do now know it and feel it. All things are coming out all 
right ; the situation will work itself clear ; the world is 
getting better ; time will solve the perplexities and administer 
the remedies ; things will cure themselves ; destiny guides 
us ; the long laws are with us ; something will be found to 
replace the wasted coal ; the hills will reforest themselves 
somehow. If God is not benevolent, trends and forces and 
tendencies are. Let nobody " knock." This is the day 
of the optimist. Whoever doubts declares his own inca- 
pacity for sane thinking. 

Laissez faire political science — It must, however, be 
admitted that the Laissez Faire school of thinking was some- 
thing more, and possibly something better, than a mere 
spontaneous religious faith or a naive natural-law meta- 
physics. Some measure of inductive support was com- 
mendably offered this a-priori faith, and therewith a plausible 
case was established. The economists of the first half of 
the nineteenth century were engaged in the study of societies 
emerging from centuries of kingship, of government by classes, 
of stupid and unjust legislation. It was clear enough that 
the progress of society lay in the breaking down of legal 
2l 



514 THE ECONOMICS OF ENTERPRISE 

barriers and limitations, in the sweeping away of the privileges 
of caste and class, and in the development of popular in- 
stitutions under the form of local and individual initiative. 
The time was one of growth and advance. A wealth of 
achievement justified the advocates of industrial liberty as 
theorists and honored them as prophets. The era was a 
series of object lessons in the blessings of untrammeled 
individual activities and in the dangers of overlegislation and 
paternalism. The benefits of increased freedom argued for 
the wider abolition of regulation, and the regime of liberty 
came to stand as the ideal toward which civilization seemed 
to tend. For most cases, it was manifest that what indi- 
viduals and peoples chiefly need is to be let alone ; that that 
part of human ill is small which kings and parliaments can 
cure. In the full flood of hope, economists argued learnedly 
that the good of each is always and inevitably bound up 
with the good of all ; that in the marvelous divine order of 
things, selfishness of motive works out in altruism of results ; 
that social ill-adjustments are due to too little liberty, too 
much meddling, or to ill-informed estimates by the individ- 
ual of his own interests. Nothing remained but to enlighten 
the people in their freedom. The future could not lie with 
restraint, but with liberty informed with knowledge. 

Derivative modern doctrines. — This brief genealogical 
record concerns the present inquiry merely as indicating the 
presuppositions, and as sketching the background of thought, 
explanatory of certain important positions in current eco- 
nomic theory. These are : In ultimate essence competition 
is voluntary cooperation. Capital is wealth stored up for 
purposes of future production and consists solely of concrete 
instrumental equipment. The test by which a thing is 
capital is the test of technological serviceability as a factor 
for concrete production in the industrial process. The 
interests of labor demand the multiplication of capital. All 
incomes are derived from participation in the productive 
process. These incomes, as distributive shares out of a jointly 
produced product of value, are received by title of social 
service performed. Distribution is part and parcel of the 



DISTRIBUTIVE ANALYSIS IN THE LARGE 515 

productive process, takes place within it, and is justified by it. 
The point of view from which the economic life is to be 
studied and by which it is to be interpreted is the social point 
of view. Each and every gainful occupation approves itself 
as socially productive, else it could not normally be privately 
gainful. 

And now it will be worth while to subject these doctrines 
to the test of the pitiless facts. But, at the threshold of this 
unwelcome task, a caution is called for. If it should have 
occurred to the thoughtful reader that the foregoing equipment 
of concepts and categories and doctrines is especially reminis- 
cent of the current productivity school of distributive theory, 
this suggestion must be promptly dismissed. Reminiscent 
of the productivity school it may in some sense be, but 
not rightly or especially or peculiarly so ; for all these are the 
concepts and categories and doctrines of current economics in 
general. They are the common property of the classical 
and of the modern. This equipment of terms and theories 
and presuppositions is the common possession of economic 
thought in the large — not of this school or the other, not of 
ancient or of modern, not of cost doctrinaires or of utility 
doctrinaires, but of the genus economist in general. 

Criticism and denial. — But to the test of the facts : the 
truth is that the essential nature of capital is not to be found 
in its significance as a category of machines and tools and 
appliances. True, these things are capital, but so also is ice 
in the ice house waiting for summer, cider in the cask aging 
to vinegar, wine in the vault acquiring bouquet and flavor. 
Not even for the wine or for the cider is James Mill's explana- 
tion — that these also work — a competent account of their 
capital character. The merchant's stock of goods is capital, 
but not as a factor of production in any industrial or 
technological process ; and, if some one should suggest that 
these are merely private, not social capital, the answer must 
be : precisely so, — capital. 

Nor is the test in the materiality of the product. Freight 
wagons or freight cars are surely somehow to be included 
within the capital category; then so, also, are passenger 



516 THE ECONOMICS OF ENTERPRISE 

cars and taxicabs — despite the fact that they are rendering 
merely the service of transporting men. But then equally 
so are excursion boats or pleasure boats kept for hire. And 
not the less so are the houses that shelter men — whether 
tenants or owners — and the land which upholds the houses. 

Nor is the line of distinction to be sought by reference 
to the wholesomeness or to the social service of the product. 
Economic productivity is not a matter of piety or merit or 
deserving, but only of commanding a price. Not a few of 
us, like a late friend of the writer, glance back over our lives 
to wonder why everything that we ever really liked " was 
either extravagant or immoral or indigestible." Actors, 
teachers, preachers, lawyers, prostitutes, all do things that 
men are content to pay for. So wages may be earned by 
inditing libels against a rival candidate, or by setting fire 
to a competitor's refinery, or by sinking spices. 

But if with consumption goods neither ethical nor social 
standards are theoretically decisive, or even relevant, for 
the question of value and marketability and economic pro- 
ductivity, so likewise are these tests equally inappropriate 
for the capital question. If whisky is wealth, distilleries are 
capital items. If Peruna is wealth, the kettle in which it is 
brewed must be accepted as capital. Then so is the house 
rented as a dive — the equipment of the gambler and the 
saloon keeper, the building and fittings of the indecent stage. 

And now note, for the larger and more general purposes of 
the argument, that if all these, as gain rendering to their 
owners, are capital, so also must the inmates of the dive 
be recognized as producers after their kind — along with 
the poor actor, the vaudeville performer, and the chorus 
or ballet girl. The test of social welfare or of artistic merit 
is invalid to stamp as unproductive any form of wealth or 
any kind of labor. Ask only whether it sells or pays. If 
jimmies are capital, being productive for their purpose, so 
also is burglary productive ; if sand bags, so highway robbery. 
The principle decisive for gambler's quarters and for gambling 
appliances holds for gambling. If the fees which the lawyer- 
receives for pleading and winning an unjust cause are earned, 
so also are the daily receipts of the beggar upon the corner. 



DISTRIBUTIVE ANALYSIS IN THE LARGE 517 

Lobbyists, panders, and abortionists are producers : that they 
are paid is the adequate proof. This is surely not to deny 
the fact of parasitism in society. But parasitism is not a 
competitive category, however far it may be a competitive 
phenomenon; it is a concept irrelevant to competitive 
analyses and competitive doctrine. It has its place only 
when the facts are to be appraised in their social significance. 
It belongs to the art of economics rather than to the science. 
It has no bearing to determine what is or is not capital. 

A new point of view. — It is, indeed, superlatively impor- 
tant, here and everywhere, to recognize that a complete 
acceptance of this private and acquisitive point of view is 
the only procedure possible, in the analysis and classification 
of the phenomena of a society organized upon lines of in- 
dividual activity for private gain. This is abundantly proved 
as soon as appeal is made to the facts and the processes of 
the actual business world. In the computation of competi- 
tive entrepreneur costs, the capital investment and the 
interest charge are reckoned upon a basis quite other than 
that of technological capital. Entrepreneur capital — 
capital in the guise in which the type form of modern busi- 
ness, the corporation, presents it — includes not merely 
consumption goods in stock, but banking balances, counter- 
money, funds tied up in customers' accounts and in bills 
receivable of many varieties, corporate stock and securities, 
whether held for sale or for investment, and generally all 
that fund of working capital, more or less unspecialized, 
requisite to the successful functioning of a business. The 
manufacturing entrepreneur or the corporation manager 
would find it a novel and perplexing doctrine which should 
restrict the capital investment to the buildings, machinery, 
and raw materials of the undertaking. The corporation 
really possesses nothing that is not capital. All things, 
then, that can be traded in, or valued, or rented, or capital- 
ized may fall within the meaning of the capital concept. 
In this sense of the term capital includes, in the price aspect, 
patents, copjo-ights, trade-marks, business connections, 
reputation, good will, privilege, government favor, franchises, 



618 THE ECONOMICS OF ENTERPRISE 

royalties, rights of toll and tribute, rents, annuities, mort- 
gage rights, personal claims. And, further, it includes 
monopolies of no matter how various kinds and degrees, so 
far as they may become the subject of invested cost in ob- 
taining them, so far as they are bought and sold as steps in 
competitive-productive investment, or are vendible upon 
the market as capitalized dividend-paying properties. All 
of these are capital for our present purposes, since they get 
into costs in the actual competitive market production of 
such commodities — hats, wheat, machinery, stocks, etc. 
— as are actually marketed. All things which, from the 
entrepreneur point of view, appear as expedient expenditure 
for the purposes of creating either a commodity or a situa- 
tion of market value are outlays of capital taking rank as 
costs of production. When the purchase of machinery is 
an advisable move in business policy, capital goes into it, 
as at another time into land or labor. When, in good busi- 
ness policy, a franchise must be had or a patent procured, 
capital is, in either case, so directed as to accomplish the 
necessary thing. When, for equally cogent business reasons, 
legislatures or city councils must be bought, the necessary 
outlays are, for cost and value purposes, precisely like ex- 
penditures for machinery or for the control of patented pro- 
cesses. Tramway franchises and sugar-refining tariffs, as 
situations business-wise obtained by the expenditure of 
capital, disclose in the current market values of the stock 
the present worth of the forecasted gains. So the expenses 
of stifling competition are capital outlays, invested as the 
costs of a monopoly to be obtained ; so also the tribute paid 
to escape cutthroat competition is a capital cost of pro- 
duction. 

Fact and description versus appreciation and appraisal. — 
All this should be easy of acceptance, but is in fact far from 
easy. Social appraisals are prone to disturb and to confuse 
all purely realistic descriptions and theoretical analyses of 
the facts of actual business. What should be, gets mixed 
with what actually is. The case is as if the physician, be- 
cause he ought to be sympathetic, were required to mix 
his hopes into his diagnoses and to write his sjonpathies 



DISTRIBUTIVE ANALYSIS IN THE LARGE 519 

into his prescriptions. One may condemn the poisoner's 
art, but this ought to argue that the chemist study poisons 
carefully rather than that he exclude them from his researches. 
Bacteriology would be of dubious service to human life if 
only beneficent bacteria were held worthy of attention. 
The zoologist who could not see a snake would be a twin 
brother to the economist who can find capital only when there 
is social productivity, and who recognizes economic labor 
and economic wages only upon condition of social deserving. 
Economists will do well forthwith to recognize that rights 
of patent and royalty are capital ; that rights of tribute 
through franchise privileges are capital ; that police permits 
to rob passers-by after midnight are capital ; that legislative 
authority to rob importers, both early and late, is capital ; 
that royal patents for tax-farming the peasantry are capital ; 
and that generally every property basis of private acquisi- 
tion is by that very fact capital. Until Political Economy 
has achieved this much of wisdom, its doctrines can express 
nothing more than a pious and commendable aspiration; 
it will still be busy with picturing Utopias or with analyzing 
hypotheses ; on this basis it must continue to lack all touch 
with life, to make itself a sheer farce — albeit conling as 
near to tragedy as comedy often gets. 

The present economic situation. — Time more than enough 
has already been spent in presenting and repeating these 
doctrinal axioms. The application of them to our actual 
American society may now properly occupy our attention : 

A great part of the 120 billions of American wealth — 
as the statisticians report it — is made up of one form or 
another of capitalized privilege or of capitalized predation. 
If, indeed, our computations include all forms and mani- 
festations of private claim and of private property in that 
to which no individual could originally have made good his 
private right of enjoyment, it is probably not going too far 
to assert that two thirds of the durable private bases of 
income in the United States are nothing else than this capi- 
talization of privilege or of predation. The market value of 
these nonsocial or antisocial forms of private capital is 



520 THE ECONOMICS OF ENTERPRISE 

merely the present worth of the right to extract tribute from 
one's fellows or to plunder one's fellows. This fraction is 
placed at two thirds as admittedly an estimate. But, as an 
estimate, it is easily made credible : 

Note the facts as reported by the 1904 census : Out of the 
107 billions of material wealth, 18| billions are reported as 
current products — clothing, personal ornaments, furniture, 
carriages. Of; the remaining 89 billions, 2 billions are coin 
and bullion. Of the remaining 87 billions, 62 billions are 
land and improvements and 16 billions are accounted for as 
public utility corporations ; 8 billions remain for live stock 
and industrial equipment. Our problem has, then, mostly 
to do with these 87 billions of social equipment — income- 
earning wealth in the ordinary sense. We find this total 
to divide into : 

8 billions of non-transportation equipment 

16 billions of public utility wealth 

62 billions of land and improvements. 
How much, then, of this 87 billions of wealth is the capitalized 
bounty of nature or the capitalized expectation of unearned 
dividends ? 

Recalling that mines and water powers are included within 
the land category, that the ground values in cities like New 
York and Chicago are twice the improvement values, that 
four fifths of the farm values are land values, that seven 
twelfths of the real estate values for a group of states not 
including New York, Massachusetts, Illinois, and Pennsyl- 
vania are ground values, that the last tax report for Illinois 
gives the town and city lots as assessed at twenty-four times 
the farm values — it is probably conservative to say that 
over two thirds of the real estate wealth of the country is in 
ground values. Here are 41 billions of unearned increment. 

Estimating, also, the value of rights of way, of user and of 
terminals, for the railroads and tramways, express companies, 
telephone, electric light, and telegraph companies, it is prob- 
ably not wide of the truth to say that one half of the 18 bil- 
lion value of public service corporations represents merely 
social values. If there is overstatement here, it surely does 
not offset the liberality in the division of real estate values. 



DISTRIBUTIVE ANALYSIS IN THE LARGE 521 

Here, then, are approximately 50 billions of unearned values 
out of a total of 87 billions. Five ninths of the durable wealth 
reported by the census is made up of privately appropriated 
social wealth. 

The difficulty is, however, that the census returns have been 
constructed upon the basis of a viciously bad concept of 
capital. In the main, the totals represent a valuation of 
material tangible items of goods or of equipment. But as 
a question not of social wealth, but of the aggregate of private 
competitive wealth, the interrelations of human beings must 
be considered. If half the population of America became 
slaves, 50 billions of wealth might forthwith be added to the 
wealth aggregate. In the mere item of public debts we have 
approximately 3 billions to be computed as private wealth 
against which no debit can be charged in the aggregate ap- 
praisal. These debts are merely the present worth of the pri- 
vate rights of some men to collect future taxes out of other men. 
Patents and franchises and privileges are all fundamentally 
of this same sort. In a general way, the common stocks of 
the later corporations are nothing more or less than the pres- 
ent worth of putative future dividends resting upon no basis 
of original investment. The Steel Corporation with its 
billion dollars of market value rests upon original properties 
of from 200 to 300 millions. The average earnings of 100 
millions would support a valuation of 2 billions if only it were 
certain that this robbery can have no end. The dividend- 
earning capacity of the Booth Company supports a capi- 
talization double that of its material assets. Sears, Roebuck 
and Company incorporated approximately 9 millions of 
tangible assets into 9 millions of preferred stock and 30 
millions of common stock : and this common stock is now 
selling at 200 — seventy millions of private wealth against 
10 millions of social wealth. Immunity from competition 
through protective tariffs, through combination, through 
franchises, and through patented processes, explains a vast 
total of private wealth of which the census takes practically 
no account. Even the item of good will — a property claim 
not necessarily predatory in its basis — means commonly 



522 THE ECONOMICS OF ENTERPRISE 

nothing more than the special ability of some particular 
corporation, for example, Sears, Roebuck and Company, to 
avoid the wastes of our prevailing system of retail merchandis- 
ing. One may conjecture — or guess — the aggregate pri- 
vate wealth of the country to be 150 billions of dollars, and 
may hazard the estimate that the 20 billions of real estate 
improvements, 10 billions of public utilities property, 20 
billions of tangible personal property and of goods for con- 
sumption — a total of 50 billions — more than represent 
the earned wealth of the country as against a total private 
wealth three times as great. How much of what earned 
wealth there is is now in the hands of those who did not earn 
it is still another question. 

The purpose here is not primarily to show how tragically 
inadequate is the single tax program interpreted as applying 
solely to unearned increments of land. So far at least as the 
single taxers go, they emphasize a real evil. Nor is it a valid 
objection to their proposed remedy that there are other 
iniquities even more seriously demanding attention. Nor is 
there time at present to point out how unworkable is the 
single tax program, so far as it intends an appropriation of 
unearned increment through the machinery of the ad-valorem 
tax. Nor is it possible here to do more than to call to mind 
the diminishing significance of these agricultural rents as 
over against the stupendously increasing importance of 
urban rents. (See Chap. XIII.) The land rent problem 
is not a problem of diminishing inportance, but of enor- 
mously increasing importance — all on the urban side. The 
assessed value of the ordinary real estate of Manhattan 
Island — two thirds of which has been shown to be ground 
value — exceeds by $900,000,000 the assessed value of all 
ordinary real estate in the United States, urban and rural, 
west of the Mississippi River, inclusive of Minnesota and 
Louisiana.^ 

Nor is the purpose — here or elsewhere — the inditing of 
any sort of socialistic screed, but simply to point out the 

1 Report of Com. of Taxes and Assessments of the City of New 
York in 1907. 



DISTRIBUTIVE ANALYSIS IN THE LARGE 523 

significance of the unearned increment of land or of privilege 
in its bearing upon the present distribution of wealth and 
of poverty. Were society later to make as great a botch of 
socialism as it has thus far made of competition, socialism 
would present the nightmare of all the ages. The present 
quest is to get to the heart of the growing poverty of some 
part of our present population — to point out, for example, 
why the wage-earning classes of our cities are finding it 
increasingly difficult to get meat to eat, and why, with the 
more unskilled of these, the Italians, for example, it is no 
longer possible for the wife and the wage-earning girls and 
the children to have any meat at all. And about all that 
can at present be done for the problem is to get it stated and 
to get its terms into the proper theoretical relation to the 
notions of competitive gain and competitive income and to 
a really modern and workable concept of capital. 

For we are to remember that, side by side with the want of 
the poor, our average standard of living is rising. We are 
to remember, also, that we are the richest nation of the world 
— not merely as measured by the colossal wealth of our very 
rich ; not merely by the flamboyant expenditure and the 
crass ostentation of our great spenders; not merely, also, 
by the sheer commonplaceness of great personal incomes 
and great property incomes — but also by the test of an 
extraordinarily high per capita productivity of consumable 
wealth. 

The truth is that no nation of the world out of all the past 
and no other nation of the present can ^ank with present 
America either in opportunities or in accomplishment in 
wealth production. The average per capita product depends 
in part upon the quality of the human being and in part 
upon the quality of his environment. As speed in running is 
partly a matter of the runner and partly of the track, so the 
productive output is explained partly by the quality of the 
farmer and partly by the quality of his farm. 

All this is merely one application of the great law of corre- 
spondence, the interplay between organism and environment. 
There are only these two ultimate forces in economic his- 



524 THE ECONOMICS OF ENTERPRISE 

tory, man and nature. If the Chinese have less per capita 
to consume than the French, it is because the Chinese produce 
less per capita. And the explanation for this must be found 
in the lower skill or vigor or energy or intelligence or scientific 
attainments of the Chinese, or in the crowded or otherwise 
unfavorable character of the habitat. If Americans live 
better than Europeans, it must be that the Americans are 
better producers — more active, more inventive, more 
enterprising — or that the soil and climate and other natural 
resources of America offer more favorable opportunities. 
(See Chap. I.) 

It is obvious that it is chiefly in intellectual power and in- 
tellectual acquirement that the modern man surpasses his 
progenitors in productive output. If we compare the modern 
industrial process with the methods of ancient times, we get 
some notion of the importance of science and art in produc- 
tion. Precisely here was the significance of the agricultural 
and industrial revolutions. Man has harnessed to his aid 
the forces of nature ; has made levers out of the elemental 
energies. It is the chemist that grows most corn. Steam 
and electricity, the printing press, the cotton gin, these are our 
free inheritance — excepting, of course, when even the field of 
scientific knowledge has been surveyed off into private hold- 
ings of patent and royalty. Even the dissemination of 
knowledge now divides its maximum toll between the paper 
trust and the type foundry association. 

The highest product of modern science is in the industrial 
technique at the disposal of the modern man as productive 
agent. As most completely master of this technique, most 
intelligent in its application, most industrious, most enter- 
prising, and most aggressive in its utilization, the Anglo- 
Saxon has made himself the leader in the industrial society 
of the new industrial era. 

Consider all that this means for the American branch of the 
Anglo-Saxon race. Other nations have tediously worked out 
the problems of progress handicapped by their own inefficiency, 
under the harsh pressure of the subsistence limit, in environ- 
ments either niggardly in the beginning or crowded by ex- 



DISTRIBUTIVE ANALYSIS IN THE LARGE 525 

panding population and exhausted by improvident use. 
Out of this long poverty there has finally emerged the modern 
civilization. And in these last days, equipped with all this 
racial heritage of technique, vigorous, energetic, and effective 
beyond all competing races, the Anglo-Saxon is now exploit- 
ing the almost inexhaustible wealth of the richest continent 
in the world — forests ready grown to his hand, limitless 
expanses of the most fertile land of the world cleared and 
ready for his plow, silver and gold in unexampled wealth, 
the main copper resources of the world, iron as dust to be 
shoveled from the surface of the earth, two thirds of the 
known coal resources of the world, and all, or nearly all, of 
the natural gas and of the petroleum. America actually 
produces three fourths of the maize of the world, more 
wheat than any other country, one third of the oats, two 
thirds of the cotton, one half of the iron, one fourth of the 
gold, three sevenths of the lead, two fifths of the coal (and, 
exclusive of the United Kingdom, more than all the rest of 
the world combined), three fifths of the copper, one third 
of the zinc, three eighths of the aluminum. 

That the fertility of the soil is being seriously depleted, 
the forests nearing exhaustion, the gas already nearly gone, 
the coal in prospect of exhaustion in 150 years, and the 
artesian water beginning to fail, does not matter to the prob- 
lem. Nor does it concern the present analysis that every 
great white way in every American city is nightly one more 
chemical orgy of waste, a crime of competitive advertising, 
for which some day hundreds of human beings must shiver 
for months. Our enormous production still goes on. It 
ought to represent itself in a generally high level of consump- 
tion among the wage earners. Instead of this, however, 
a goodly percentage of our laborers are close to the margin 
of starvation. 

It is, indeed, an extraordinary outburst of productive 
achievement which we are witnessing — a combination of 
productive efficiency with favorable opportunity never 
paralleled in the past history of the race, and never to be dupli- 
cated again in all the years of the long future. No new con- 



526 THE ECONOMICS OF ENTERPRISE 

tinent is left to be opened. Modern science and virgin 
opportunity can never again concur. 

But both the science and the opportunity are still with us ; 
and the fabulously generous product derivative from these 
is still with us ; and yet there is dire poverty for hordes of 
hard-working men. For this poverty of income with the 
poor there is only one possible line of explanation, the prod- 
igal incomes of the rich. We are to recognize that, as there 
are incomes which are earned by contribution to the satis- 
faction of human desires, wise and unwise, there are other 
incomes which, though socially earned, are not earned by 
their recipients : and that there are still other incomes which 
are obtained through making the general income the smaller 
— so much the more as there is for the one individual, there 
is the less for all. As Professor Carver has put it, incomes 
are of three sorts, " earnings, findings, and stealings." The 
stranger is it that as theorist he has not carried over — but 
has rather denied — these same distinctions in their appli- 
cations to the notions of capital and of income. For it is 
clear that in one respect the prostitute has the advantage 
of the receiver of ground rent, and still more of the monop- 
olist, that she, at least, renders a quid-pro-quo for what she 
receives, while neither of the others does. 

These different cases of property income, iniquitous in 
origin and productive of innumerable abominations, divide 
for present purposes into three classes : 

1. Cases where rent is collected upon a really productive 
item of property ; where, therefore, the only question is as 
to the right of receipt of the income : capitalized bounty of 
nature. 

2. Cases like franchises, where social productivity is 
absent, but where rent to somebody is inevitable unless 
portions of the traffic are deliberately made unprofitable. 
No competitive extension of the traffic is practicable to cancel 
the rent : capitalized privilege. 

3. Cases where profits express not merely the lack of social 
productivity, but an interference with social productivity 
through the restriction of product or the deterioration of 



DISTRIBUTIVE ANALYSIS IN THE LARGE 527 

product. These are not cases of a bad distribution of a social 
product, but of incomes dependent directly upon the degree 
in which social productivity is prevented : capitalized 
predation. 

The single taxer is thus fundamentally right in his declara- 
tion that public revenues should be derived so far as is possible 
from the social estates — from incomes not due to individual 
effort in the production of social service. Any system of 
taxation, no matter how scientific, is yet bad which has not 
first exhausted these sources of income before taxing any 
other. 

But our present system is bad even without reference to 
this limitation. So far from taxing unjustifiable incomes 
equally with the justifiable, it places most of the burden upon 
the justifiable and exempts the unjustifiable. The difficulty 
is, then, not merely that 15 billion dollars' worth of agri- 
cultural land has become private property, on which the 
millions of disinherited must pay rent and by virtue of which 
they become " trespassers in the land of their birth " ; not 
merely, also, that untold millions of dollars in urban sites are 
now the source of landlord income ; not merely that the coal 
mines belong to the coal barons, the copper to the senators, 
and the gold and silver mines to the other rich, the water 
powers to tha syndicates ; not merely that all sorts of fran- 
chises have fallen into private ownership, appropriating 
gains that should be social, and at the same time imposing 
monopolistic restrictions of product and exactions of tribute, 
— but also that our tax system is directly adapted to aggra- 
vate all of these evils. In the main the revenues are collected 
upon the consumption of the incomes of those very classes 
that have been already grossly exploited in the distribution 
of those incomes. The poor are plundered as producers by 
monopolistic restrictions on production, and then are plun- 
dered again as consumers through consumption taxes upon 
that which has been produced. Wages that are inadequate 
at the best buy still less through the consumption taxes to 
which these wages are subjected. If, in truth, then, we 
either can not or will not disturb the vested rights already 



528 THE ECONOMICS OF ENTERPRISE 

accrued in land wealth, and if we will not appropriate or 
cancel the franchise rents, and if we will not or dare not 
burden, by progressive taxation of some sort, the exercise 
of exploitation and the collection of tribute — if, that is to 
say, we have turned over even the tax function to private 
ownership — we might at least experiment awhile with 
serious inheritance taxes. The pressing problem is to estab- 
lish equality of opportunity — the elimination of handicaps. 
If society is to remain democratic politically, it must be 
democratic economically and socially. 

The need of a new economics. — But it is no part of the main 
purpose of this volume to discuss the shortcomings of the 
competitive order in its present working, or to indicate the 
lines of necessary reform, or to attack or defend the com- 
petitive principle either in its present manifestations or in 
some probable better future. The purpose has been solely 
to outline the theoretical categories which the actual facts 
of current production and distribution require and impose. 
Every art must have its corresponding science, or both must 
suffer. It is, then, for some one to construct an economic 
science adapted not only to the requirements of the facts, but 
to the needs of their amelioration. To this end Economics 
must cease to be a system of apologetics, the creed of the 
reactionary, a defense of privilege, a social soothing sirup, 
a smug pronouncement of the righteousness of whatever is — 
with the still more disastrous corollary of the unrighteous- 
ness of whatever is not. The facts which are, and the facts 
which are to be, are equally in need of economic categories 
to fit them. If the program of social progress does not 
harmonize with the existing economic science, something is 
the matter with one or with both. It is in the conviction 
that the fault is with the Economics that this book has been 
written. Its aim has been to furnish to progressive social 
workers that ultimate basis in economic theory which is 
theirs by right of truth. 

We economists must, then, come to recognize that we have 
not rightly analyzed the notion of capital and have wrongly 
interpreted the question-begging term productive in economic 



DISTRIBUTIVE ANALYSIS IN THE LARGE 529 

affairs. We have assumed that private gain and social 
welfare are approximately interchangeable concepts. As we 
have failed to see that some profits and some wages are mere 
predation, so we have failed to recognize that some of the 
capital is as iniquitous and disastrous for social welfare as 
other of the capital is beneficent. Noting that some of 
it is good, we have inferred that all of it is good. By our bad 
analysis, in our blindness to the distinction between social 
productivity and private productivitj^, between that which 
ethically is production and that which ethically is predation, 
we have allowed ourselves to stand — and mostly we have 
stood — as defenders of all. 

And blind to this same distinction we have, for example, 
advised, wherever we have finally become conscious that 
iniquity has become capitalized, that this sort of capital be 
subjected to no greater rates of burden than apply to right- 
eous sorts of capital. To the extent that we favor the general 
property tax at all, we favor taxing all property at one rate. 
We shall, possibly, some day come to see that capital in a 
competitive society is merely a source of private gain, and 
that private possession may attach to everything that is 
permitted, legally or illegally, to render gain to the owner. 

In that good, and possibly far-off day, we shall have 
ceased to believe and to teach that price expresses either the 
marginal pain of production or the marginal utility of con- 
sumption ; or that price expresses the social pain cost or the 
social utility of goods, or both together — for example, that, 
since the dollars paid by the wearer of artificial flowers or of 
pearls are the same dollars received by the flower girl or by 
the pearl diver, these dollars must express an equality be- 
tween hardship on the one side and joy on the other; that 
units of capital are units of stored-up outlay of labor pain, 
and that interest is therefore both indirect wages and in- 
direct and proportionate reward for labor pain ; that the 
reward for capital is further justified on the one side by the 
painful abstinence of the capitalist and on the other side by 
the social service which the capital renders ; that capital is 
thus a homogeneous fund of serviceability to human welfare ; 
2m 



530 THE ECONOMICS OF ENTERPRISE 

that distribution everywhere tends to conform to deserving — 
all competitive gain being righteous, and all incomes suffi- 
ciently certifying their merit by their receipt ; that land rents 
have no part with other costs in fixing the prices that com- 
sumers must pay ; and that since these lands harmlessly 
earn their rents, the rents from them may rightly go to pri- 
vate owners. 

When, in short, we have changed our calling from the 
painting of Utopias and the capitalizing of dreams, and have, 
as scientists, brought ourselves somehow into touch with 
fact, the prosperous may no longer deride us or the disin- 
herited curse. There will need be no laughing then any- 
where, and if there be cursing, it will have changed its source.^ 

^ Writing in 1852, John Stuart Mill said that if choice were to 
be made between Socialism and the existing state of society — "if 
the institution of private property necessarily carried with it as a 
consequence that the produce of labor should be apportioned as 
we now see it " — then all the difficulties of Socialism " would be 
but as dust in the balance." 

Private property, he added, was supposed to assure to individuals 
the fruits of their own labor and abstinence, and " the principle of 
private property has never yet had a fair trial in any country. The 
laws have never yet conformed to the principles on which justi- 
fication of private property rests. They have heaped impediments 
on some to give advantage to others. They have purposely fos- 
tered inequaUties. ... If the tendency of legislation had been to 
favor the diffusion instead of the concentration of wealth — to 
encourage subdivision of the large masses instead of striving to 
keep them together — the principle of private property would have 
been found to have no necessary connection with the physical and 
social evils which almost all Socialist writers assume to be insepa- 
rable from it." 

For the further discussion of the justice of the competitive system 
of distribution, reference may be had to G. Lowes Dickinson's 
Justice and Liberty. The following citations, however, concern the 
present discussion mostly for their masterly analysis of the forces 
going to determine gainf ulness in terms of price : 

" Whether a man must work, whether he is to be permitted to 
work, or whether he is to be dispensed from the necessity of working ; 



DISTRIBUTIVE ANALYSIS IN THE LARGE 531 

and, again, at what he is to work, whether at manual labour or at 
one of the professions, whether at a skilled or an unskilled employ- 
ment, whether at an art, or a handicraft, or a mechanical routine ; 
all this is governed by the amount of property owned by his parents 
or himself. And, again, the remuneration he is to receive for his 
labour is fixed by the same condition. Either he has access to well- 
paid or to ill-paid work ; and the access, though it depends partly 
on natural capacity, depends still more, in practice, on opportunity. 

"... The labour which is best remunerated and most coveted, 
that of the professions and of the higher posts in business, is far 
more accessible, if not exclusively accessible, to the sons of the rich 
and of the well-to-do than to others. It requires, to begin with, 
an elaborate and expensive education ; and even if that be dispensed 
with, relationship and social connexion count for much. . . . Op- 
portunity is the monopoly of the well-to-do. It follows that since 
the well-to-do are a small minority, the great mass of men are 
predestined to the less interesting, more laborious, and worse re- 
munerated kinds of labour. ... It is not the power to create or ad- 
minister wealth, but the bare possession of it that confers position. 
And into possession of it men come by the most capricious and ac- 
cidental ways, by inheritance, by gift, by lucky speculation, or what 
not. 

"... Note what immense wealth is distributed without any 
reference to labour or desert. The existence of classes more or less 
hereditary, the permanent stratification of society into the rich and 
the poor, in a word, the plutocratic character of our community, is 
due to this feature of our system of distribution. The principle on 
which it is based . . . is not desert, in the sense that the recipient earns 
what he receives. ... I should be inchned to say that a man's 
desert is greater in proportion as his labour, being useful, is also 
disagreeable and onerous; so that, of two men making contribu- 
tions to wealth, that one would deserve and should receive more 
whoseworkwasthe hardest to perform. . . . If that view be taken, 
it is not desert that apportions the rewards of labour? On the 
contrary, the most onerous and painful and unhealthy work is the 
worst paid, and the most agreeable, healthy, and interesting the 
best. So that it is the very opposite of desert, in that sense of 
the term, that regulates the distribution of wages. 

"... What, for instance, is a Barrister's contribution to wealth, 
and what is a dock-labourer's ? Does a barrister add anything? 
Or does he only subtract? ... His services are wanted, and 
valued, because men are dishonest, or because the law is doubtful and 
obscure. . . . He does not produce ; at the best he diminishes the 



532 THE ECONOMICS OF ENTERPRISE 

friction of production ; ... at the worst, when he is engaged, as he 
often is, in exaggerating not in settHng disputes, he is increasing in- 
stead of diminishing the friction, and destroying rather than creating 
wealth. 

"... Turning now to the dock-labourer, or to any class of manual 
workers, they at least are in a very direct, simple and positive sense 
producing wealth. ... By what process is it decided that what 
they produce is worth sixpence an hour, while the barrister's in- 
tervention to diminish or perhaps to increase the friction of the 
industrial machine is worth £10,000 a year? 

"... The fact, at any moment, is that scarcity determines reward. 
The more people there are competing for a piece of work, the less 
they get, and vice versa. And society is so arranged that there 
are always far more people competing for the more disagreeable 
and onerous tasks, than for the more interesting and attractive. 

" . . . As things are now, all the occupations that are most inter- 
esting, stimulating and delightful, that employ the highest faculties, 
and are the most worth doing for their own sake, are, broadly speak- 
ing, the best paid, while those that are sordid, dreary, mechanical, 
dehumanising, hardly receive a Uving wage. . . . 

"... The one motive of the exploiter being to make money for 
himself and incidentally for his shareholders, he and they will always 
be ready to make it at all cost to society. It will not matter to 
them whether what they produce is a good thing or a bad thing, so 
long as it is one for which, by fair means or foul, they can create a 
demand. They are as likely to devote their energies to poisoning 
the community as to feeding it, if the conxmunity, as is unfortunately 
apt to be the case, responds to the invitation to be poisoned. 

" The capitalist . . . plays on the instrument the tune he pre- 
fers, and his tune is apt to be very low and vulgar. Nay, when he 
comes to deal with uncivilised peoples, what he plays is a dance of 
death ; for he does quite dehberately, and with a clear conscience, 
exterminate them by cheap gin unless the public authority inter- 
venes. ... It is no part of the capitalist's aim to husband the 
resources of any community. If he can pay big dividends, say 
for fifty years, that is all he need trouble about. The future of a 
country or a society is nothing to him, for he will not be there to 
make money out of it. So that, for instance, he will always be in 
a feverish haste to exploit natural wealth at all and every cost to 
the community. He will cut down its forests, exhaust its mines, 
spoil its climate, and ruin its population body and soul — as was 
done in this country and in all countries during the industrial revo- 



DISTRIBUTIVE ANALYSIS IN THE LARGE 533 

lution until the State stepped in to stop it, and as is being done 
before our eyes at this moment in the Congo Free State, not to 
speak of cases nearer home. All this he will do without ruth, with- 
out shame, without reflexion even, if, in his short-sighted book- 
keeping, it seems to pay him to do it. . . . The system of pro- 
viding in this particular way the stimulus to and the direction of 
production does lead to these consequences, and they must be set 
off against its undoubted efficacy as a developer of energy and in- 
telligence. 

"... Our method of flinging upon the resources and the popula- 
tions of the world the unconscionable greed of capital, is open to 
these very grave objections. I might add others, and especially 
those which are recognized as the ' wastes of competition,' ad- 
vertisement, overproduction, adulteration, commissions and all the 
rest of it. But I have said enough to remind you that the price 
paid for our method of stimulating production is a pretty heavy 
one" (pp. 55-132 passim). 



INDEX 



Abstinence : see Interest. 

Abstraction : as scientific method, 
101. 

Accumulation : as test of productive- 
ness, 123. 

Acquittance : see Money and Cur- 
rency. 

Adaptation : see Man and Environ- 
ment. 

Advantage and Size : see Returns. 

Affiliations : and gains, 399. 

Agricvilture : improvements, related 
to rent, 201 ; enlarge cities, 
201 : see Land, Land rent. 

Annuities : all durable properties 
bear, 223 ; present worth of, 
225, 228. 

Art vs. Science, 29. 

Austrian School : marginal analysis, 
53. 

B 

Bagehot, Walter : on loan fund, 345. 

Balance of Trade: in Mercantilist 
doctrine, 506. iSee Money 
and Currency. 

Banking : see Money and Currency. 

Bargaining : see Price. 

Barter, 4 ; requires two price trades, 
237 ; inconveniences of, 237 ; 
multiplies intermediates, 
237, 255. 

Bastiat, F.: 512. 

Bergson, Henri : 174. 

Bimetallism: see Money and Cur- 
rency. 

Biology : see Specialization. 

Black Death : 425. 

Boehm-Bawerk, Eugen v. : 54, 55, 65, 
168. 

Bounty of Nature: 495. See Distri- 
bution. 



Brown, Harry C. : 250. 
Bullion : see Money and Currency. 
Bullock, C. F. : 25, 374, 429. 
Business Ethics : see Ethics. 



Cairnes, J. E. : 345, 346. 

Calculation : see Utility. 

Cameralists : 505. 

Capital, Capitalization, and Interest : 
Capital : what wealth is produc- 
tive, 491. 
All income is psychic, 488 ; pri- 
vate and social, 19, 331- 
342, 497; definition, 132; 
money is, 334 ; is credit ? 
334 ; social capital a vague 
concept, 333 ; coUectivist 
capital, 336 ; what capital 
includes, 161, 335 ; all rent- 
earners are capital, 128, 
162 ; all durable goods are 
capital, 209 ; capital cor- 
relative with interest, 162, 
173 ; anti-social uses, 134, 
272; test of capital, 172- 
176 ; Socialistic view, 501 ; 
intangible assets, 131 ; 
loan fund, 407 ; savings 
and supply, 338, 342, 367; 
stored-up labor, 163, 373- 
376. 
Land vs. Capital : origin of dis- 
tinction, 372 ; classical 
view, 163-172 ; natural vs. 
artificial instruments, 165 ; 
origins, 165, 167, 358, 
509; technology, 166, 515; 
mobility, 168, elasticity 
of supply, 169; political 
significance, 171 ; dimin- 
ishing returns, 171 ; . Eng- 
lish Law, 510. See Chaps. 
XII, XIII. 



535 



536 



INDEX 



Materiality : 515 ; wholesome- 
ness of use, 516 ; social wel- 
fare, 528 ; some capital not 
due to labor or saving, 359 ; 
some land produced, 168 ; 
growth of capital, 339 ; error 
from wrong concept, 528. 
Loan fund form : the thing 
lent, 342 ; a part of the 
currency, 406 ; recognized 
as capital by high author- 
ity — Ricardo, Bagehot, and 
Cairnes, 344-346 ; nature 
and supply, 339-342 ; rela- 
tion to social welfare, 342 ; 
source in savings and in 
banking, 347, 407. 

Capital and Capitalization correlative 
terms, 210-211; free men 
not capital, 211. 

Capitalization, Chaps. XIV, XV ; 
vs. cost as fixing price, 211- 
216 ; with durable consump- 
tion goods, 212; with du- 
rable production goods, 213- 
217 ; doctrine applies 
safely only in money econ- 
omy, 221 ; reducing future 
incomes to present price, 
210 ; incomes of use, 209 ; 
rates and capitalization, 
409 ; individualized analysis, 
410; offered view vs. cur- 
rent view, 225 ; over-ration- 
alization, 227. 
Interest : paid to modify the money 
circulation of income, 355- 
356 ; distinguished from 
rent, 132 ; loan vs. rental, 
347 ; interest paid for pres- 
ent currency against future, 
386 ; abstinence and inter- 
est, 357, 359, 362, 387, 389 ; 
abstinence, rightly inter- 
preted, a truism — a fore- 
gone use, 362-363 ; but not 
a pain, 373 ; abstinence in 
renting land, 371 ; marginal 
saving, e.g. Rockefeller, 
366-367; different absti- 
nence theories, 370-376. 
Rates : many, 409 ; a time com- 
pensation for a time use, 
492 ; the rate a price ad- 



justment between demand 
and supply, 332 ; reserva- 
tion rates, 382-385 ; not a 
pleasure-pain equation, 386. 
Demand : gainful uses, 368- 
369 ; variety of investment, 
411; rents, 403, 462; na- 
ture of returns, 376 ; opera- 
tors' surpluses, 379 ; social 
service, 380 ; durable con- 
sumption goods, 377-379 ; 
several independent causes 
of gain to borrower, 381 ; 
present income vs. future, 
364-365. 
Supply : abstinence, 362-363, 
370-376 ; banking, 349 ; its 
effect on interest rates, 349- 
352, 387 ; components of 
bank rate, 351 ; banking is 
insurance, 349, 352. 

Carver, T. N. : 167, 450, 526. 

Cause and Effect : separation of, 107, "^ 
116. 

Census : of wealth in U. S., 519 ; 
criticism, 520. 

Charity: 309. 

Checks : see Money and Currency. 

China : product in, 6 ; wages in, 6. 

Cities : cause of growth, 200-202 ; 
rents in: see Land and 
Rents. 

Clark, J. Ef. : 453. 

Classification of Factors: Chap. 
XXII. ,See Factors of Pro- 
duction. 

Climate : see Man and Environment. 

Coin : see Money and Currency. 

Collectivism : defined, 62-63. 

Combination : see Monopoly. 

Commodities : see Consumption 
Goods. 

Communism : defined, 62, 63. 

Communities of Interest : related to 
gain, 399. 

Competition : defined, 474 ; good 
and ill in, 476 ; merely a 
present institution, 20 ; 
wastes in, 478 ; often self- 
destructive, 479, 482. 

Competitive Order : Chaps. II, III, 
IV; is pecuniary, 21. 

Complementarity : see Factors of 
Production. 



INDEX 



537 



Concentration : see Giant Business. 

Consumers' surpluses, monopoly : see 
Surpluses. 

Consumption vs. destruction, 491. 

Consumption Goods : immediate, 
future and durable, 209 ; 
limitation on, 2 ; average, 2 ; 
elasticity of use, 455 ; with 
food products, 456-458. 

Corporations : see Giant Business. 

Correspondence : see Man and En- 
vironment. 

Cost : see Price. 

Cost of Production : see Price; costs 
mainly identical with dis- 
tributive shares, 413 ; tradi- 
tional view of kinds, 414- 
416. 

Credit : see Money and Currency. 

Crises : see Money and Currency. 

Cultivation : Margin of, see Land 
and Land Rent. 

Currency : see Money and. 

Customs : see Tariff. 

D 

Deferred Pajonents : see Money and 
Currency. 

Demand : see Price ; as explaining 
opportunity cost, see Price. 

Depressions : see Money and Cur- 
rency. 

Desiredness : see Utility. 

Desires : see Utility ; desires related 
to products, 3 ; hedonism, 
86 ; for pleasure, 86. 

Destruction vs. consumption, 491. 

Diagrams : see Graphs. 

Dickenson, G. Lowes, 530. 

Diminishing Return : see Returns. 

Disorder : see Security. 

Distribution: defined, 10; viewed 
in the aggregate, Chap. 
XXVIII ; dependent on 
production, 490, 491 ; a 
price process and problem, 
29, 138 ; costs are distributive 
shares, 190, 413; primary 
and secondary, 138, 494 ; 
affected by property institu- 
tions, 495, 531 ; by taxes, 
494, 527; privilege, 496; 
franchises, 496 ; monopolies, 



496 ; wealth and opportu- 
nity, 497 ; gifts, 494 ; durable 
goods, 491. See Proportion 
of Factors. 
Productivity Theory of. Chap. X ; a 
price process, 138 ; validity 
of, 140 ; scarce factors 
favored, 448-449. .See Pro- 
ductivity Theory. 

Dividends : related to risk, interest 
and profit, 459. See Giant 
Business. 

Division of Labor : see Specializa- 
tion. 

Dumping, 473. 

Durable goods : absorb capital, 377 ; 
bear income, see Income; 
and capital, see Capital. 

Dynamics : vs. Statics, 424 ; classifi- 
cation of changes, 453 ; im- 
proved technique, 453 ; re- 
lated especially to land rent, 
455. See Factors of Produc- 
tion; Returns. 

E 

Economics : defined, 25 ; the field, 
25 ; economic motive is 
least sacrifice, 59 ; relative 
to conditions, 30 ; need of 
a new, 528-530. 

Efficiency : isolation, 34-35. See 
Wages, Specialization, In- 
terdependence, Productiv- 
ity, Distribution. 

Elasticity : supply, see Cost ; of con- 
sumption, 51. ^ee Land and 
Rent. 

Eliot, George: 12, 87. 

Ely, R. T. : 25. 

England, Bank of : 286. 

Entrepreneur : defined, 67 ; point of 
view in Economics, 143 ; 
who are, 139 ; role in Dis- 
tribution, 139. 

Environment : Chap. I ; differences 
in, 6. ^ee Man and. 

Experience : as test of what is, 87, 
121. 

Explanation : what is, 389-391. 

Ethics : code of business, 461 ; Ethics 
and Economics, 29 ; as test 
of product, 126-127. 



538 



INDEX 



Exchange : competitive requires 
money, 37 ; transfers goods, 
not values, 247. See Price 
Regime; Money; Price; 
Specialization ; Competi- 
tion. 

Expansion : see Money and Currency. 

Expenses of Production : see Cost. 



Factors of Production : Chap. XXII ; 
traditional classification, 
161, 179, 413-415; four- 
fold, 429 ; condemned, 421 ; 
a great diversity in degree 
and kind, 417; traditional 
exaggeration of technology, 
446 ; what costs are techno- 
logical, 447 ; interrelations 
of factors, 419 ; interde- 
pendence and substitution, 
179, 420, 448; limits on 
substitution, 178-179 ; com- 
plementary factors, 449 ; 
different relations to each 
entrepreneur, 427 ; condi- 
tion one another in use and 
as costs, 116; the technolog- 
ical relations, 431. See Re- 
turns ; Proportion of Fac- 
tors. 

Farming : profits related to size of 
investment, 498-501. 

Fetter, F. A. : 25, 257, 488. 

Fisher, Irving : 250, 369. 

Fluctuation : see Money and Cur- 
rency. 

Franchises : see Capital ; Distribu- 
tion. 



G 



Gambling : 405. 

Generalizations: their adequacy, 101. 
See Abstraction. 

Giant Business : monopoly methods, 
472 ; contrasted with farm- 
ing, 464 ; costs in, see Price. 
See Monopoly ; Returns. 

Gifts : see Distribution. 

Gold : see Money and Currency. 

Goods: defined, 1, 102; durable, see 
Capital; as demand for 



other goods, and for money, 
39. See Utility; Price; 
Money and Currency. 

Graphs : of price adjustment, 48-50. 

Gregory, Kellar and Bishop : Physi- 
cal and Commercial Geog- 
raphy, 13. 

Gresham's Law : see Money and Cur- 
rency. 



H 



Habit : relation to utility, 98. 
Hadley, A. T. : 375. 
Harriman, E. H.: 462. 
Hedonism : 86 ; not implied in util- 
ity, 99. 
Higgling : see Price. 
High Finance : see Giant Business. 
Hobson, J. A. : 189. 
Hyde, A. M. : 189. 
Hypothesis : place of, 390. 



Idle plants : 468. 

Income: nominal and real, 1; are 
psychic, 488 ; does not im- 
ply hiring or renting, 131. 
See Capital, Capitalization 
and Interest. 

Increasing Return : see Returns. 

India : wages in, 2, 3. 

Individuality : test of, 389. 

Inflation : see Money and Currency. 

Institutions : change, 19. 

Insurance ; Chap. XX ; as cost, 399 ; 
banking is, 349-352. 

Intangible assets : see Capital. 

Integration of industry : see Giant 
Business. 

Intelligence : and production, 8. 

Interdependence : and specializa- 
tion, 33 ; efficiency, 33. 

Interest : see Capital. 

International Trade : see Money and 
Currency ; Tariffs. 

Isolation : hardships and inefficiency 
in, 35. See Efficiency. 



Jevons, W. S. : 189. 
Johnson, A. S. : 25, 189. 



INDEX 



539 



K 

Eling : Gregory's Law, 456. 



Labor : see Wages. 
Labor cost : see Price. 

Laissez f aire : 477, 479, 511, 513. 

Land and Land Rent : Chaps. XII, 
XIII; Land as capital, see 
Capital : Land rent as cost, 
see Price. 
Land Rent : Ricardian doctrine, 
181-183, 184-187; criti- 
cism of, 186-188; views of 
Ricardian disciples, 186- 
187; later development of 
Ricardian doctrine, 186. 
Population and rural rent : 190 ; 
and urban rent, 190 ; ex- 
tension of cultivation, 180 ; 
intensive and extensive, 
181 ; margins, 181 ; ulti- 
mate causes of rent, 207 ; 
technology and. Chap. XII, 
420 ; transportation and, 
421, 455 ; urban rents 
compared with rural, 197 ; 
differentials of position in 
urban rents, 197 ; nature 
of advantages, 198 ; ulti- 
mate causes, 197 ; tenden- 
cies, 200-202. 
Rents and individual desert, 198 ; 
up-keep of land, 178. 

Laughlin, J. L. : 311, 312, 313, 314, 
316. 

Law of Diminishing Returns : see 
Returns. 
Of Increasing Returns : see Returns. 

Least Resistance : see Sacrifice. 

Liberty : advantages of, see Laissez 
faire. 

Loan Fund : see Capital. 

Luxury : 308. 

M 

Macfarlane, C. W. : 189. 

Malthus, T. R. : 426. 

Man and Environment : Chap. I, 2, 
5 ; in United States, 524- 
526 ; adaptation of differ- 
ent kinds, 13; mostly in- 



tellectual, 13 ; limits on, 15 ; 
interactions, 11. 
Man : as producer, 7 ; intelli- 
gence, 8 ; morality, 8 ; 
foresight, 8 ; institutions, 9- 
10. 
Man : not product or wealth or 
capital, 124, 211. 

Margins : in general, 53. See Price ; 
Land rent. 

Market : concept of, 383 ; market 
price, see Price ; market 
value, see Price. 

Marshall, Alfred: 25, 189, 401, 
429. 

Marx, Carl: 301, 312. 

Materiality : see Capital ; Produc- 
tion. 

Measurement: is quantitative, 243. 
jSee Money ; Value ; Price. 

Mill, James : 515. 

Mill, J. S. : 25, 189, 429, 508, 530. 

Mismanagement : of business for 
gain, 460. <See Giant Busi- 
ness. 

Money and Currency: Chap. XVII. 
Money: defined, 4, 256, 257 ; rela- 
tions between money, 271 ; 
test of, not in redeemability 
or legal tender power, 257 ; 
but in service as actual in- 
termediate, 255 ; required 
for exchanges, 37 ; making 
possible competitive special- 
ization, 37 ; effects on social 
dividend, 4 ; is general pur- 
chasing power, 489-490 ; all 
its functions aspects of the 
intermediate function, 255 ; 
standard, 255 ; storehouse 
of purchasing power, 40, 
256 ; optional power, 40, 
269 ; power of legal acquit- 
tance, 256 ; important qual- 
ities, 259 ; gold and silver 
fulfill, 259. 
Barter : obviated, 4, 38 ; with its 
inconveniences in the mxilti- 
plication of media, 38, 255 ; 
money the specialized inter- 
mediate, 237. 
Money as standard : cannot ex- 
press or measure utility, 93 ; 
or anything else, 239-243. 



540 



INDEX 



Money more than mere com- 
modity, with distinctive 
theory, 271. 

Currency: made up of money and 
substitute media, 254 ; as 
intermediate, 255. 
Demand for currency in ex- 
changes, explained by 
trader's surpluses, 267 ; al- 
location of these, 267-269; 
sellers' the greater, 268 ; 
elasticity and inelasticity of 
demand, 269, 271-273. 
Supply : sources of, 257 ; bullion 
statistics, 321, 325-326 ; cost 
of production, 265. 
Banking supplies currency — 
credit, 40, 259-263, 317; 
credit based more on pros- 
pective product and income 
than on existing wealth, 277; 
what banks lend, 263 ; un- 
derwrite credit, creating cur- 
rency, 260, 263 ; analysis of 
discount rate, 351 ; method 
of issue of deposit credit, 
260 ; this credit currency is 
part of loan fund, 264 ; cost 
of supplying it, 265-267 ; 
effects on interest rates, 349- 
352 ; basis of banks sol- 
vency, 264. 
Reserves : function of, 261 ; 
economy of use, 262 ; legal 
requirements, 286 ; double 
counting, 288 ; aggregate 
and separate, 286, 287. 
Commercial Crises : 280-295 ; 
credit : benefits of and dan- 
gers, 283 ; collapse of, 282 ; 
conditions preceding crisis, 
280 ; rising prices, 281 ; 
some credit contracts, 291, 
298; other expands, 293, 
298; effects, 290-291; re- 
stricted production, 292 ; 
restricted consumption, 293; 
falling bidders' prices, fall- 
ing reservation prices, and 
falling market prices, 318- 
319 ; responsibility for, 287, 
289, 294; duties of banks, 
in crisis, 285, 289 ; reorgani- 
zation to prevent, 284 , 



Depression after crisis : 295- 
306 ; high prices and high 
dividends displaced by low, 
295-297; prices fall un- 
equally, 298 ; and faster 
than wages, 299 ; disturbed 
production, 300 ; disposi- 
tion to save rather than to 
consume, 300-304 ; empha- 
sis on money and on provi- 
sion for the future, 301, 302 ; 
borrowing for equipment 
purposes fails, 304-305 ; un- 
der consumption, 319; the 
revival, 303. 

Deferred Payments : Chap. XVI; 
money is the standard, 238 ; 
its function as quid-pro-quo, 
238, 246; its instability, 
243-246; harming debtor 
or creditor, 245 ; test in 
equality of utility, 242, 247 ; 
not in value, 241-244 ; value 
as a ratio between goods is 
not quantitative, and can- 
not measure or imply equal- 
ity or inequality of service, 
239-243 ; not durable goods 
but only immediate con- 
sumables included in proper 
payment, 249. 

Quantity Theory : 310-321; In- 
flation and prices, 279, 280 ; 
phenomena of crisis, 317; 
and depressions, 319. 

Gresham's Law : 278 ; in inter- 
national trade, 278. See 
Bimetallism. 

Bimetallism: 321-330; com- 
pensatory action, 321-325; 
national, 324-325 ; inter- 
national, 324-325; effects, 
327-330 ; advantages and 
disadvantages, 327-330. 
Monopoly: Chap. XXVI; defined 
in contrast with competi- 
tion, 474-476 ; natural, 481 ; 
present in degree in all pros- 
perous business, 486 ; 
buyers' with sellers', 482, 
483 ; unwise legislation 
creating, 484 ; influences 
pressing toward, 482 ; giant 
industry, 484 ; transporta- 



INDEX 



541 



tion, 481 ; cut-throat com- 
petition, 483 ; effects on 
distribution, 497 ; inroads 
on producers' and consum- 
ers' surpluses, 481 ; surplus 
products, 473 ; idle plants, 
468 ; costs in monopoly 
production, 463 ; fixing 
prices, 464 ; group control, 
485 ; regulation, 485. 

N 

Natural Law : 512-513. 

Natural Bounty : 520. See Distribu- 
tion. 

Needs : see Desires. 

Newspapers : expenses in establish- 
ing, 486. 

Nominal income : see Income. 
1907 : panic year, 286. 



O 



Officers : gains from mismanagement, 
460; from speculation, 461. 

Opportunity : differentials of, 400. 

Opportunity cost : see Price. 

Optimism : 511. 

Ostentation, 309. 

Over-rationalization : in capitaliza- 
tion analysis, 227-232; in 
demand analysis, 100-102. 

Ownership : see Regime of Price. 



Pain : minimizing of, 59. See He- 
donism. 

Panics : see Money and Currency. 

Parasitism : consistent with produc- 
tion, 127. 

Patten, Sunon : 189. 

Payment : see Money and Currency. 

Physiocrats : 507. 

Pioneer : hardships of, 35. 

Pleasure : maximizing of, 59. See 
Hedonism. 

Plotting : see Graphs. 

Point of view : see Viewpoint. 

Political Economy : see Economics. 

Population : place in Physiocratic 
doctrine, 507 ; land supply, 
180-181 ; rent, 180-181 ; 



wages, 180-181, 450. See 
Rent ; Wages. 

Poverty in United States, 527. 

Power, as income, 493. 

Predation : consistent with produc- 
tion, 127. 

Present : it exists, 174. 

Price : defined, 23 ; organizing, cen- 
tral and characteristic in 
competitive order, 21-28, 
37, 38 ; ultimate forces 
in, 143 ; antagonism with 
utility, 480 ; of durable 
goods, involves capitaliza- 
tion, 219 ; price exchanges 
are the actual, 39. See 
Capitalization. 
Demand with Supply : 

Process of adjustment: Chap. 
V, 82 ; affected by changes 
in either term, 85; terms 
goods, not values, 247 ; af- 
fects volume of sales, 57 ; 
interdependence of all prices, 
113, 274 ; reservation prices, 
46-48 ; external view of 
market ; internal or analytic 
view, 44 ; higgling, 96. 
Demand : reciprocal between 
money and good, 51 ; de- 
mand schedule, 43 ; assumes 
prices on other goods, 113; 
is money demand for a 
particular good, 39 ; gen- 
eral relation to good, 141 ; 
alternative function as cost, 
71, 72 ; does it require 
analysis ? 97. See Utility. 
Marginal Utility, 85, 88-90; de- 
pendent on scarcity, 91 ; 
related to price offer, 91 ; 
but incommensurable with, 
92 ; extremely rationalized 
concept, 98-99 ; marginal 
price offer, 81 ; fixed by 
comparison of marginal utili- 
ties, 93; only a temporary 
indifference, 101. 
Supply: Chaps. VI, VIII; price 
with fixed supply, 57 ; as 
with monopoly, 464. 
Cost, Cost of Production : focus- 
ing point of influences, 74, 
75 ; price-determining and 



542 



INDEX 



price-determined, 193 ; costs 
are distributive shares, 190; 
in isolated economy, 60. 

Entrepreneur cost : Chap. VII, 
191 ; not fundamental, 106- 
108 ; forward-looking, 69 ; 
the price denominator, 70 ; 
what are included, and their 
bases, 413 ; traditional doc- 
trine, 414-416; innumer- 
able kinds and bases, 133, 
159 ; all hires are, 160 ; 
principal kinds, 61, 67, 160; 
connotes elastic supply, 63 ; 
cost analysis more difficult 
than demand, 142 ; circuity, 
113; ultimate causes in 
scarce factors, 75, 111-116; 
assume prices on other prod- 
ucts, 113-114; resisting de- 
mands as costs, 36, 71-72; 
costs are reservation prices, 
46-48, 73 ; opportunity 
costs, 61, 63, 65, 190, 191; 
alternative profits, neces- 
sary and unnecessary, 66, 
148, 152, 190-191, 464; 
margins and cost, 64-65. 

Pain as cost : labor pain, 60, 70, 73, 
79, 82, 107. 

Risk, as cost : Chap. XX, 399 ; 
insurance, 399. 

Rent, as cost : Chaps. XII, XIII, 
175 ; ultimate causes of 
rent costs, 190, 192 ; busi- 
ness rents in cities, 204-208 ; 
are selling costs : views of 
J. S. Mill, Jevons, Patten, 
Hobson, Macfarlane, A. S. 
Johnson, Marshall, — 189 ; 
various land difi'erentials as 
costs, 188. .See Capital. 

Interchangeability of costs, 178. 

Long-time and short-time, 441, 
468-472. 

Margins and Marginality : 64, 77, 
78, 81, 95; in classical doc- 
trine, 164 ; pain margins, 
81 ; marginal businesses, 78 ; 
not determinants, 95. 

Giant Industry : 464-467 ; costs in 
average conditions, 469 ; fa- 
vorable, 470 ; adverse, 471. 
See Chap. XXV. 



Monopoly costs, 463. 

Size of business, 440-442. See 

Returns. 
Scarce factors, 448. 

Price Regime : Chaps. II, III, IV. 

Producers' surpluses : see Surpluses. 

Product : includes, 491 ; irrelevant 
whether producer consumes, 
128 ; variety of, material and 
immaterial, 120 ; men are 
not, 124; related to desire, 3. 

Production: what is. Chap. IX; 
tested by price results, 121, 
376 ; not by materiality, 
121, 125; or tangibility, 
121, 125; or permanency, 
123 ; or deserving, 126 ; 
means merely proceeds, 127 ; 
theft, etc., are, 130 ; limits 
Distribution, 490-491. See 
Distribution. 

Productive vs. unproductive : his- 
torical views, 123 ; lands, 
machines, men fall under 
same test, 128; in all their 
valuable uses, 128 ; produc- 
tive factors, see Factors of 
Production. 

Productivity, Productivity Theory : 
Chap. X ; see Distribution ; 
productivity not precisely 
distinguishable, 145, 146, 
147, 148, 217; all durable 
wealth is, 492 ; product 
means proceeds, 150-152 ; 
no ethical connotations, 153. 

Profit: defined, 132, 404; related 
to risk, 401 ; wages and prof- 
its distinguished, 66, 67 ; 
profits and size, 440^42 ; 
surpluses, 152. 

Property : see Distribution ; Regime 
of Price. 

Proportion of Factors : see Returns. 

Protective Tariff : see Tari£f. 

Providence guides : 511. 

Psychic Income: see Income. 

Psychology : of price offer, 100. 

Public work : best done when, 309. 

Q 

Qualities : are relative to men, 87. 
Quantity Theory of Money : 311-321. 
See Money and Currency. 



INDEX 



543 



R 



nationalization : see Over-ration- 
alization. 

Redeemability : see Money and Cur- 
rency. 

Regime of Price : Chaps. II, III, IV. 

Rent : see Capital and Interest ; 
Land and Rent; rent distin- 
guished from interest, 128. 

Reservation price : 128, 382-385. 

Reserves : see Money and Currency. 

Resistance, least : see Sacrifice. 

Returns, Laws of : Chap. XXIII ; 
factors of production, tra- 
ditional view, 414-416; the 
principle of proportion, 423 ; 
static vs. dynamic, and social 
vs. competitive, 423, 430, 
433, 436 ; proportions and 
relative prices, 430 ; in 
view of prices of products, 
430 ; wider than a land 
law, 431 ; or than technolog- 
ical relations, 431 ; bearings, 
435 ; distribution and. Chap. 
XXIV, 435. 
Advantage and Size : Chap. 
XXIII, 438, 498; applies 
to competing industries, 
441 ; a law of price results : 
applications, 442 ; related 
to profits, 441-442, 498; two 
laws distinguished, 438- 
441 ; economies of size and 
danger from, 479, 485. 

Ricardo, David : 183,373. See Rent; 
Rent and Cost; Labor cost; 
Pain as cost; Capital; 
Land and Rent Distribu- 
tion; Price. 

Risk : and profit, 400 ; and interest, 
401, 461; and dividends, 
462 ; noninsurable risks, 
399; are costs, 398; affilia- 
tions related to risks, 399 ; 
distribution of gains and 
losses, 403, Chap. XX. 

Roscher, Wilhelm, 7. 

S 

Sacrifice, least : the fundamental 
generalization, 58-59. 



Salary : see Wages. 

Sales: see Exchange; Price. 

Savings : as loan fund, see Capital ; is 
all good? 306-307; rela- 
tion to social capital, 408. 
iSee Capital ; Depressions ; 
Abstinence. 

Seager, Henry: 25, 429. 

Security : and product, 9. 

Selfishness : as datum in science, 101. 

Seligman, E. R. A. : 25, 430. 

Senior, N. W. : 29, 30, 57, 375. 

Services: are products, 123; general 
nature of, 123, 125 ; as in 
social dividend, 493. 

Sidgwick, H. : 25. 

Silver : see Money and Currency. 

Single Tax : 522, 527. 

Size: see Returns; Monopoly. 

Slavery : 10. 

Small competitor: greater risks, 401. 

Smith, Adam : 25, 508. 

Social Capital : what is, 19. <See Capi- 
tal. 

Social Dividend: Chap. XXVII; 
nature, 1, 488 ; includes all 
consumable valuable goods, 
489 ; not money, 4 ; but 
^ services of men and of du- 
rable consumption goods, 
492 ; power and prestige, 
493. See Distribution. 

Socialism: 62-63; its system of 
theory, 31. 

Social Organism: 387-394; and 
Productivity Theory, 153- 
155. 

Specialization: Chap. IV; cost of 
production one aspect of, 
58. <See Money and Cur- 
rency. 

Speculation : 404, Chap. XX. 

Spending : defined, 358. See Luxury. 

Standard : see Money and Currency; 
of living, 307 ; and wages, 2, 
450-452 ; rising in United 
States, 523. 

Static analysis : and dynamic, 424- 
425, 450. 

Stock Exchange: price-making in, 
42. 

Stocks : statistics of prices in, 296. 

Subjective valuation: 93. 

Substitution : see Returns. 



544 



INDEX 



Supply : related to situation, 17 ; see 
Price ; marginality and, 81. 

Surpluses: traders, 481; monopoly 
and, 481. See Profits. 

Survival of fittest, 20-21. 



Tangibility : see Production. 

Tariff, protective : monetary diffi- 
culties, 280. 

Taussig, F. A. : 163, 374. 

Taxation: 437, 443, 522, 527, 529. 
See Price. 

Technology : traditional exaggera- 
tion, 446 ; what costs are, 
416, 447 ; and land rents, 
455-458. 

Theft: is productive, 150, 153. 

Time : and product, 492. See Capital, 
Capitalization, and Interest. 

Trade: see Exchange; Price; Money 
and Currency; Specializa- 
tion ; Competition. 

Traders' Surpluses : see Surpluses. 

Transportation : related to rural rent, 
199, 455 ; to residence rents, 
201 ; business rents, 213. 



U 



Unearned Increment : 520, 522, 527. 

United States : poverty in, 523, 527 ; 
production in, 525; re- 
sources of, 525. 

Unproductive labor : 505. 

Unseen Hand : 511. 

Utility: Chap. VII; defined, 86; 
always individual, not ag- 
gregate or social, 97 ; is 
desiredness, 86, 99; habit 



and, 98 ; calculation, 100 ; 
impulse, custom, and habit, 
98 ; related to price offer, 
52, 85 ; antagonism with 
price, 480; marginal, see 
Price. 

V 

Value : defined, 24 ; see Price ; an 
exchange ratio between 
specific goods in definite 
quantities, 236 ; actually 
deduced from prices, 237, 
240 ; not quantitative, 239- 
243 ; over intervals of space, 
242 ; of time, 242 ; in cur- 
rent exchanges, 242 ; Mar- 
ket, see Price. 

Veblen, T. B. : 143, 403, 486. 

Viewpoint: 143, 517- 

W 

Wages : defined and distinguished 
from Profits, 66, 67 ; stand- 
ard of living and, 2 ; related 
to land shortage, 181, 452. 

Walker, Francis, 258 n. 

Want : see Desires ; Price ; Poverty. 

Waste: 308. 

Wealth : defined, 132 ; services from, 
the test, 129 ; no ethical 
test, 130 ; in United States, 
519-521. See Capital. 

Webb, Sidney and Alice, 269. 

Wieser, Friedrich v. : 449. 

Wilson, Woodrow : 485. 

Work : see Labor ; Wages. 



Young, A. A. : 385. 



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